What to look for in earnings
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During the earnings season hundreds of companies announce earnings.
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Most of those earnings are of no use.
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What you need to look for is a game changing earnings.
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Only 1 or 2% of the companies will have earnings which are really worth jumping into immediately.
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Also you must look at where the earning is in its earnings cycle.
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Your primary objective to is to find stocks in early phase of their earnings acceleration cycle.
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In the stock has been rallying and this is the third or fourth earning acceleration then it has been already priced into the stock.
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Prior price neglect is extremely critical when looking at earnings.
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Ideally you should be looking for stocks with 3 to 4 months or more of neglect.
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When you look at the company earnings look at the magnitude of the earning surprise.
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On a day-to-day basis, many companies beat earnings by one or two cents.
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Those companies are not worth a second look.
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Also when looking at the earning look at it whether there is the analyst estimate on it.
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Primary look for companies with no analyst estimate or only 1 or 2 analyst covering the stock.
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If the company doesn’t have analyst estimate it tells you that it is a neglected company.
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If the company has analyst estimate then you should look for consensus earning numbers or Whisper numbers.
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If a company beats consensus earnings estimate by a wide margin then it is attractive candidate.
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You also made to look at whether company preannounced earnings or guided higher.
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In such cases, the real earnings announcement does not move the stock.
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How you look at earnings also depends on your trading style.
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If you’re primarily a daytrader, then any earnings beat is worth looking at.
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But if you’re looking for a longer duration move then you need to concentrate on extreme earnings. Extreme earnings growth of 100% plus from a big base.
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Companies over the years have become better at managing their earnings.
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So, they skillfully manage investors expectations.
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They preannounce or guide higher or lower the guidance ahead of the earnings so that there is no earnings shock.
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In spite of such earnings expectation management, earnings surprises happen.
- That is where the opportunity is
Source: http://stockbee.blogspot.com/2017/04/what-to-look-for-in-earnings.html
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