How to Make Earnings Season Profitable Instead of Painful

By TradeSmith Research Team

I don’t expect earnings “watch parties” to be high on most people’s list of fun things to do, but my calendar is full of them as we head into the next reporting season.

I’m more of a profits geek than a data nerd – and that’s where the fun comes in.

The bottom line is the bottom line. Quarterly earnings give us the most information we ever get about a company’s business.

Those fundamentals – along with technicals and Big Money inflows – are the critical factors in my quantitative analysis system that accurately predicts whether a stock will go up or down.

Results can be good or bad for a stock, depending on the company and – even more so – the expectations.

Which brings us to something you should know when analyzing earnings reports…

Analysts’ estimates are almost always wrong.

I get that they can’t nail earnings-per-share to the penny. That’s not what this is about.

It’s about how often they are wrong and how consistent they are in their wrongness.

Last quarter, 82% of S&P 500 companies beat analysts’ expectations. That’s according to FactSet, a great source of earnings data and analysis. Those smaller yellow blocks are the times estimates were correct.

The quarter before that, 79% of S&P 500 companies earned more than analysts said they would.

And over the last five years, 77% of companies exceeded estimates on average each quarter.

The pattern is clear: Analysts undershoot about 80% of the time.

Companies beating expectations can often lead to nice “upside surprises” that shoot a stock higher.

But… missing already low estimates can be painful.

You obviously want to be on the right side of that move.

Here’s how you can use earnings season to make smart choices, put the odds in your favor, and set yourself up for big gains.

3 Rules for Earnings Season

A river of financial numbers will be flowing over the next few weeks, and my computers will be working overtime. Sales, profits, margins, and cash are all part of the “Fundamental Score” that helps determine a stock’s overall Quantum Score.

We see more Fundamental Score changes during the four earnings seasons than at any other time of the year. These help us identify stocks likely to move higher.

With all this in mind – especially the inaccuracy of analysts’ estimates – here’s how I recommend you play earnings season.

Go into earnings season already owning fundamentally superior stocks. I’ve found through my research that sales growth, earnings growth, profit margin, debt levels, and valuation are among the most predictive fundamental characteristics of future share prices.

If you own the best and strongest businesses, you’ve got very good odds of an upside surprise or at least a continuation of growth.

Don’t buy right before earnings. Earnings are often binary events, and surprises can be negative as well as positive. If you don’t already own a stock right before earnings, take a seat, grab your popcorn, and watch the show.

Let data be your guide. Did you expect anything different from a quant investor?

Once the report is out, you have the information you need to make an informed decision. If the company’s fundamentals are strong, its price action is favorable, and Big Money is flowing in, odds are high you have a winner. I can count on a roughly 70% probability based on back testing and use of my Quantum Edge System.

My Favorite Buy Scenarios

I’ve found that the two best buying scenarios can sound somewhat contradictory, but who cares if you make good money?

I like to buy after a company issues a spectacular report and the stock shoots higher on big volume. Volume is the key. If a stock pops on average or below-average volume, it’s less likely to sustain that momentum. This is the Big Money component that is critical to a stock’s upside.

Conversely, if a stock with strength in all three of those areas (fundamentals, technicals, and Big Money inflows) dips on earnings – and if the stock is already in an established uptrend – it is probably a misguided reaction from investors looking for an excuse to take profits. That means it’s a buying opportunity for higher prices down the road.

These same two scenarios tend to be the most common with stocks I already own or recommend. They usually either pop on big volume with the likelihood of continuing higher, or they dip temporarily before marching higher.

For example, Arista Networks (ANET) is both our biggest gainer (up 54%) and highest-rated stock in TradeSmith Investment Report.

Source: and TradeSmith Finance

Analysts expect ANET earnings to grow 20.6% when results are released in February. And I expect results will reinforce the big upside potential of this networking leader, regardless of the immediate post-earnings reaction from investors. (And it’s above our buy limit right now, so a pullback would almost surely be a buying opportunity.)

That’s the importance of owning the best stocks with the strongest fundamentals and technicals and Big Money flowing in anytime, but especially before earnings are released. And if you don’t own them before earnings, the results help you get into the best ones for the next reporting season just three months later.

Talk soon,

Jason Bodner
Editor, Jason Bodner’s Power Trends