Inside: My 1-2-3 Earnings Trading Plan

Jan 14, 2023

By now, most of you are aware of LikeFolio’s famous Weekly Earnings Scorecard: a “tip sheet” that goes out every Sunday with earnings scores and trade ideas for every company reporting earnings in the week ahead.

Did we model this after a horse racing tip sheet inspired by a day at the track? Maybe. But you get the idea.

This is our high-level view of every company reporting earnings and the metrics that matter.

But even before I look at the Earnings Scorecard and dive into individual companies, I like to “zoom out” and create a foundational thesis for the overall market and the consumer sectors that these companies are capitalizing on.

Here’s the 1-2-3 process I use to prepare for a (hopefully very profitable) earnings season…

No. 1: Focus on Stocks Where Earnings Signals Align with Market Performance

The overall market has made a nice recovery off of October lows, with an especially fruitful rally over the past couple of weeks.

Nevertheless, the overall downtrend is still intact… for now.

When I’m constructing an earnings trade, I always like to start with the overall trend of the market, as broad market movement can act as a headwind or a tailwind for individual stock positions.

As long as the S&P 500 downtrend remains in place, I’ll be leaning heavier and more aggressively into our bearish earnings signals.

Should we see a breakout to the upside for the overall market (4,050+ on S&P 500), I’ll be more inclined to focus on our positive, bullish earnings signals.

No. 2: Use Consumer Trends by Sector to Spot Big Profit Plays

Understanding where the consumer is hot — and where they’re not — is an enormous leg up heading into earnings.

Here’s a little cheat sheet I made for the upcoming earnings season:

This is a breakdown of overall consumer spending behavior.

Sectors on the left (green) are seeing positive consumer traction — a tailwind for companies in that sector. This could make executives more optimistic when they talk about their full-year 2023 outlook.

Sectors on the right (red) are just the opposite. Consumers are cooling their spending in these categories, which could make the company more conservative in the expectations it has for the year.

If I see a negative earnings score on a company that is in a green consumer sector or a positive score on a company in a red consumer sector, I will probably either pass — or play it far more conservatively.

On the flip side, if a company’s earnings score lines up with the overall consumer trend for its sector, I’ll move into the trade aggressively, seeking big profits.

No. 3: Be Ready Early and Often

Next week it’s all eyes on Netflix Inc. (NFLX), which we’ll cover more in-depth for you in tomorrow’s Q1 Earnings Season Preview (watch for that to hit your inbox).

But that’s really just the kick-off to an enormous month of major earnings announcements from the bulk of the S&P 500.

In fact, 77% of S&P 500 companies will report earnings in the next 29 days.

And that means big — scratch that… *Huge* opportunities to profit on an almost daily basis.

It’ll be exciting, fun, and hopefully very profitable…

Especially with a solid 1-2-3 plan in your back pocket.

Remember:

  1. Focus on stocks where earnings signals align with market performance…
  2. Use consumer trends by sector to spot big profit plays…
  3. And be ready early and often.

Let’s get after it!