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This could be the last earnings season before rate cuts. The stock market has pushed up to all-time highs as investors anticipated the end of the current rate hike cycle. Fueled by monster tech stocks like NVIDIA and Tesla, the tech-heavy NASDAQ has been hitting new highs nearly every day. With this frothy, borderline "bubbly" action happening, there is a growing crowd of detractors looking for a rotation. The anticipated rotation so far has been out of mega cap tech and into the small caps. It's a vote for the future of the US economy. The irony is that economic data appears to be softening, with joblessness creeping up and earnings rolling over. Now the market is looking to the next round of earnings to set the stage for the end of the year. The A.I. theme has dominated the headlines this summer, but that focus is likely to shift in the near future. That is the story for the overall market. As for individual stocks, there will be big winners and losers depending on the strength of their reports. This brings to mind one of the most confusing things about earnings season: Why do some stocks skyrocket on a positive earnings surprise while others fall off a cliff? In this article we are going to tackle this little understood issue. Better yet, I will share with you two ways to profit from surprises this earnings season. More on that later. 3 Reasons Stocks Can Drop After a Positive Earnings Surprise 1) Estimates vs. Expectations: The standard definition of an earnings surprise is when actual earnings comes in higher than earnings estimates. But those estimates are the "published" numbers from the brokerage analysts. Quite often investors tend to develop their own unique set of expectations that can differ greatly from the Wall Street analysts. If there is too much optimism ahead of the release, then actual earnings will need to be a blowout in order to appease investors' inflated expectations. This is the most common reason why some stocks fall after a "supposed" earnings beat. 2) Quality of Earnings: The highest quality earnings come from having robust revenue growth. This means that the company's products or services are in high demand and should stay that way into the future. However, these days far too much of the earnings being reported is generated from cost cutting and other "accounting gimmickry". The problem with that is that the benefits of these moves don't last. When the market gets a whiff that the earnings are unsustainable, no matter how strong the beat, shares will most likely drop. 3) Forward Guidance: Plain and simple, when you buy a stock you are taking an ownership stake. And what owners of companies care about is the stream of future earnings. So if a company beats earnings for the quarter just reported, but warns that future quarters will see lower earnings, then that stock will go down . . . and go down fast. 2 Ways to Make Money on Earnings Surprises So now that we have outlined things that can go wrong after an earnings surprise, let's shift gears and talk about something even more important; How to turn a profit from earnings surprises. Here are two ways to go about it. More . . . | ||||
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| Good Way: Buy shares in any company that had an earnings surprise and rose the day following the news. These stocks experience what academics call the "Post Earnings Announcement Drift". Studies clearly show that these stocks usually outperform the market over the next 9 months. Conversely, you should sell any stock in your portfolio that misses its earnings numbers as it is likely to underperform the market for the next few quarters. The downside of this approach is that there are literally thousands of stocks to choose from every quarter. Best Way: Find stocks where the earnings "whispers" tip you off that a big surprise is coming. Buy the shares shortly before the announcement and enjoy quick gains of 10%, 15%, 20% when the earnings surprise is officially reported. I know what you're thinking. There are no Magic 8-balls for the stock market, so how can this be possible??? But fret not; this isn't a magic show. It's pure science. The concept of finding a profitable source of earnings whispers has long been the Holy Grail of stock investing. Many experts have tried and failed to make this work. In fact, we had been researching this for countless years. Early on we found clues that identified stocks more likely to surprise, but not necessarily rise in price. It wasn't until the summer of 2010 that we discovered the right combination of elements. Since refinements were made in 2014, the system has correctly called POSITIVE surprises a whopping 80% of the time with the vast majority accelerating in price. The Easy Way to Apply This Breakthrough Here's the challenge: In each earnings season, including now, there are hundreds of stocks that are likely to achieve positive surprises. That is why our Zacks research team poured so much effort into creating a special strategy that uses additional filters to narrow down the lists. It detects rare companies that are most likely to both beat earnings and jump in price. This drives the portfolio I am managing called the Zacks Surprise Trader. I can't share all the details of the proprietary formula with you, but I can tell you this: our system relies on two under-used signals coming from the brokerage analyst community. These two whispers are then layered on top of other proven elements such as the Zacks Rank and Zacks Industry Rank to find only the best stocks . . . in the best industries . . . with the best chances of beating earnings and quickly rising in price. If you would like to receive our precise whisper trading signals through the heart of this earnings season, I invite you to look inside our Surprise Trader portfolio ASAP. Now is the absolute best time to do it. From 234 companies scheduled to report earnings next week, I have locked onto a small handful of standouts predicted to exceed expectations when their earnings reports are released. New Surprise Stock to Post Monday Morning Check our live recommendations right now, and be first to the one I'm adding Monday. You can take advantage of ripples of buying even before a company reports earnings. Don't miss your chance to beat Wall Street to the punch and make the most of the potential double-digit price pops. Our signals predict big positive surprises and they've been right a remarkably consistent 80% of the time! They've led us to recent gains like +49.8%, +28.5%, and +39.9% in as little as 4 days.¹ Bonus Report: Another reason to look into this now is that you are also invited to download our just-released "Early Warning Alert" report. It reveals Stocks to Sell BEFORE They Report Earnings in the Coming Weeks. Our strategy works both ways, and you can use this report to avoid companies that are more likely to report negative surprises from July 15 through August 1. See our Surprise Trader stocks and "Early Warning Alert" before the deadline — Sunday, July 14 » All the Best,
Dave Bartosiak is Zacks' resident earnings surprise expert. He selects stocks and delivers daily commentary for our Surprise Trader portfolio. | ||||
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| ¹ The results listed above are not (or may not be) representative of the performance of all selections made by Zacks Investment Research's newsletter editors and may represent the partial close of a position. Access grants you a comprehensive list of all open and closed trades. This free resource is being sent by Zacks.com. We look for investment resources and inform you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms of Service". https://www.zacks.com/terms_of_service Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research is not a licensed securities dealer, broker or US investment adviser or investment bank. The Zacks #1 Rank Performance covers the period beginning on January 1, 1988 through June 3, 2024. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank #1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance_disclosure for information about the performance numbers displayed above. Zacks Emails Zacks Investment Research |
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