How to Make Money on Earnings Reports

 

We just saw several good swing trading opportunities on the back of great earnings reports.  In todays blog post, we will be going over how we make money on earnings reports along with things to watch out for in todays market.

 

How to Make Money on Earnings Reports

 

The best way we know of to trade earnings reports is to look for a great stock in a long-term uptrend, with strong growth, a bullish consolidation pattern and then look for a good technical entry point right after a big blowout earnings report and guidance raise.

 

We want to see the company beat on earnings by a wide margin, sales by at least 1%, have at least double digit growth in earnings and sales, and raise their guidance in sales or earnings ideally.  This can be the actual earnings report and press release pre-scheduled or an earnings pre-announcement released ahead of the earnings release date.

 

Right after the report, we want to see the price reach a good technical entry point on a daily chart the next trading session.  A good example of this is the SMCI pre-announcement we alerted subscribers to in January just before the stock doubled in price again in about a month.

 

Although the move may be overdone at this point, the stock had a good chance of moving 25% to 50% from the open the trading session after the announcement was made.  This is because of the strength of the report, the long-term trend and relative strength of the industry.

 

How to Evaluate an Earnings Report

 

The 3 most important numbers we look at are earnings, sales and margins.  Other important numbers include cash flow, debt and inventory levels.

 

But we want to see the company beating the consensus earnings and sales forecast by a wide margin.  Most companies will beat by a small margin which is pre-planned ahead of time.  Companies know that its not a good idea to miss earnings estimates or your stock could crater after earnings so they tend to slightly underestimate earnings.

 

So most will beat by a small margin.  We are looking for those exceptional situations where the company is beating by a very wide margin and raising their guidance.

 

A good example of a great earnings report was POWL last week.  In the last blog post on the Darvas Box potential comeback this year, we talked about the box pattern developing on POWL.  Since then POWL reached the entry point in our earnings flag strategy and ran another 15% higher.

 

We featured it to customers just before the explosive breakout as it was nearing a breakout point after hours a few days before the blog post was written.

 

Staying Well Fed for a Lifetime

 

“Give a man a fish, and you feed him for a day; teach a man to fish and you feed him for a lifetime” is a famous quote that certainly applies to trading.

 

When trading, we want to stay well fed.

 

And this is where you can learn how to fish so listen up….

 

The reason we featured the stock is that it beat by 98 cents per share on the bottom-line.  This is nearly 100% more earnings than what was expected.

 

The revenue for the quarter beat expectations as well.  This could be found on the seeking alpha earnings announcement.  Other sites will carry this news as well including the company’s website in most cases.

 

You can see that revenue growth was nearly 60% year over year so this company has a lot of growth currently also.  Revenue beat consensus analyst expectations by over 6%.

 

A much larger percentage beat on the bottom-line versus the top-line implies much better margins as well which is ideal.  So here we have good growth, a big earnings beat, sales beat and margins are much better than expected with a big guidance raise.  The blowout earnings report we are looking for.

 

Not too many companies will do this but some will each quarter and its a good idea to get a list of them each quarter.

 

Other Important Metrics

 

Triple digit growth is even better as was the case with SMCI.

 

Another good sign is if the portion of the business that has the most growth potential with a large total addressable market had very strong growth numbers that were better than expected.  PLTR is a good example of this last week.

 

PLTR was featured Monday evening to our customers right after an earnings report where their commercial business grew much faster than expected.  Their new AIP AI boot camp and marketing strategy was working better than expected.

 

This portion of the business has a very large potential total addressable market.  So the fact that this portion of their business was accelerating is a good sign.  Plus, investors are starving for more AI investments currently as can be seen by the move in NVDA and SMCI after we featured them in powerful ascending and flat base patterns.

 

Another good sign was the price of the stock gapping much higher after hours.  Normally, a big move after a big earnings beat occurs on stocks that are gapping around 10% or more at the open the next day.

 

If the relative strength of the industry is very high, the long-term trend of the stock is bullish and the price is breaking out of a good consolidation pattern with a high growth rate of sales and earnings, it could be a big winner after the report.  In other words, it could open the next day, confirm price direction early, and then soar another 20% or more offering a pretty straightforward swing trade.

 

Palantir reached our entry trigger the morning after we alerted subscribers last Monday evening and the stock took off.  It made a 25% move higher for customers from our target entry point in just 3 trading days.

 

Palantir did not have the big earnings beat but the commercial business grew much more than expected with a great outlook.  Their new marketing strategy is now more proven with a big growth runway ahead.

 

The chart below shows what can happen to a stock after a bullish earnings report.  Again, notice how the stock goes 25% higher after the open the next day in just 3 days.  No need to buy ahead of the report and have the company miss expectations in some key area and then lose money because of it.  DT, another AI-related stock, had a strong chart before earnings and fell 10% right after their earnings report due to lower annual recurring revenue.

 

 

 

Charts courtesy of StockCharts.com

 

 

The Overly Simple Earnings Report Strategy

 

Some like to “take a shot” by buying a stock ahead of their earnings report hoping they will beat earnings and the stock will open up a lot higher in price the next day.

 

The past week is another good example of why this can be a bad idea.  Last week, META had a blowout earnings report and gapped much higher.  This was after other big tech companies, Tesla and Google, went down a lot after their earnings report even with exciting projects in the pipeline.

 

Some would look at the META report and then buy PINS or SNAP ahead of their report.  The thinking is that they missed META but other companies in the space may be ready to rally and start reporting blowout earnings results.

 

What happened?  Well, both PINS and SNAP reported disappointing earnings or outlooks in their earnings reports and both stocks took a nose dive afterwards.  In fact, the price opened well below the prior days price to leave a lot of those using the overly simple buy the rumor sell the news strategy holding the bag.

 

The past couple years have been much more difficult to hold through earnings.  This can happen when you are coming out of a bear market especially.

 

In Summary

 

Earnings, sales, cash flow, growth in those metrics, and those numbers relative to expectations are usually what matter most to us when evaluating an earnings report when swing trading.  In the case of network-based business models, subscriber growth can be the most important metric to look at.  For instance, Netflix and Spotify will often trade on subscriber adds and we want to know those numbers relative to expectations.

 

Each business has important numbers that traders focus on.  Amazon, for instance, may trade more on AWS acceleration or their new advertising business that is growing quickly.  However, the numbers mentioned above usually matter most.

 

How do you make money on earnings reports?  Well, one way is getting lucky on guessing the earnings, sales, outlook, costs and margins ahead of the report.

 

Another way is to trade after the report which is our preferred method.  The earnings eruptions strategy, earnings flag and consolidation breakout afterwards could be explosive and deliver some big profits quickly.

 

While PLTR soared 25% right after the report quickly, TENB hit the 5.5% stop we used after entering a similar post-earnings trade last week.

 

In some market environments, buying ahead of the earnings report may make sense but the past couple years have seen a lot more losing trades using this approach on good stocks with so much uncertainty over the economy, inflation and rates.

 

Trading after a big blowout report with a big beat on key metrics for the stock can be a lot more rewarding without the guessing.  And if you think NVDA, SMCI and PLTR were fun just wait until we see a round of good AI IPOs come to market later on.

 

 

 

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