The Ultimate Guide to Trading Earnings Season – T3 Live
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The Ultimate Guide to Trading Earnings Season

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Do you have an earnings season strategy?

Because there's more opportunity than any time of year.

You're about to find out why.

In this super in-depth article, you're going to understand just about everything there is to know about earning season.

And if you're ready to jump right into trading earnings now, check out Sami Abusaad's Earnings Engine course.

Here's your table of contents:

What Is Earnings Season?

Before you can understand how to trade during earnings season, you need to understand what earnings season is.

Earnings season is when the bulk of publicly-traded companies deliver their quarterly earnings reports.

These reports contain a variety of financial information on the business’s performance in the previous quarter, typically including (but not limited to):

  • Balance Sheet
  • Income Statement
  • Cash Flow Statement
  • Other helpful facts and figures, like performance of certain business units and products.

Stocks tend to have big movements upon the release of earnings reports because investors make new decisions about each company's future.

An earnings report can make you encouraged, discouraged, or even indifferent about a stock's prospects.

When Is Earnings Season?

There is no official earnings season.

Historically, traders considered aluminum company Alcoa's (AA) quarterly reports to be the kickoff of each earnings season, since it was always the first company in the Dow Jones Industrial Average to report.

Now that Alcoa's been removed from the Dow, the new 'unofficial' start to earnings season occurs 2-3 weeks after the end of each calendar quarter, when the big banks like JP Morgan (JPM) and Bank of America (BAC) report earnings.

Earnings season activity peaks about 2 weeks after that, when a cluster of tech companies like Amazon (AMZN) and Intel (INTC) report.

At the peak, over 150 companies report earnings in a single day.

Then, the frequency of earnings reports declines for another 4 weeks, upon which earnings season is more or less over. 

However, outside of the traditional earnings season, at least a few companies report almost every day. This is because some companies have different fiscal quarter and year-ends.

For example, Nike (NKE) operates on a May fiscal year, so it does not deliver its quarterly reports during earnings season.

Why You Should Care About Earnings Season

Earning Season action is different than regular market action.

Since there's so much important news being released, stocks bounce around like crazy.

And remember, a company's earnings report can affect multiple stocks.

For example, when Apple (AAPL) reports earnings, it has a huge impact on the entire tech sector, and especially its suppliers.

How to Find Out When a Company Reports Earnings

The single best way to find out when a company reports earnings is to go to the investor relations section of its website.

Companies typically issue press releases with the official earnings date and time.

You can also find a company's earnings date on hundreds of websites including Yahoo! Finance and Nasdaq.com.

However, if a company has not yet announced an official earnings date, it will be estimated based on historical norms. 

These estimates are usually correct, but occasionally, they'll be wrong.

Speaking of historical norms, companies tend to be very consistent with their reporting schedules.

For example, Netflix (NFLX) always reports after the market close about two-and-a-half weeks following the end of the calendar quarter.

About Earnings Report Releases and  Conference Calls

Earnings reports are typically posted on a company's website, and also distributed via press release. 

Management will then hold an earnings call about 30-60 minutes after the release. 

An earnings call typically starts with prepared comments from the company's CEO or CFO, followed by a Q&A session with Wall Street analysts.

They tend to last about an hour.

You can listen to these calls live, or catch replays after. And several online publishers including Seeking Alpha actually provide transcripts of the calls.

Keep in mind that some companies will announce guidance during a call, instead of in the actual earnings release. 

How to Find Consensus Earnings and Sales Estimates

Earnings don’t just exist in a vacuum.

Wall Street analysts from firms like Morgan Stanley (MS) and Goldman Sachs (GS) will forecast a company’s performance ​based on in-depth research.

Investors pay most attention to analysts' forecasts of the following items:

  • Earnings per share
  • Sales
  • Profit margins
  • Unit sales

These forecasts are then averaged into "consensus estimates" by financial news/data organizations, the most prominent of which are Reuters and Bloomberg. The numbers sometimes differ slightly between them, but they're generally very close.

Like with earnings calendars, These consensus estimates are widely available online.

Here's a section from Reuters' listing of estimates for Apple (AAPL):

Reuters lists the sales and earnings per share estimates by quarter, along with how those estimates have been treding.

Traders like to see how a company's reported results compare with these consensus estimates.

But beware -- a company can beat earnings estimates and see its stock drop.

For example, Marketwatch reported that Johnson & Johnson fell despite strong earnings and guidance:

How Earnings Reports Affect Stock Prices

The impact of earnings on a stock price is not an exact science.

Here is a small selection of the factors that can impact a stock's reaction to earnings:

  • Earnings per share (relative to expectations)
  • Sales (relative to expectations)
  • Profit margins (relative to expectations)
  • Product unit sales (relative to expectations)
  • The company's future outlook (relative to expectations)
  • Comments made by executives on the conference call
  • How much the stock is up or down before earnings

As you just learned, it is not uncommon for a company to beat expectations and fall. And a company can report terrible earnings and see its stock rise?

Why?

It's all about expectations (see how many times we used that word), which is related to how much a stock is up or down before earnings.

For example, if a stock runs higher into earnings, it signals that expectations are very high.

So a strong report may be priced in, reporting in a "sell the news" reaction.

How to Judge Earnings Season as a Whole

We talked a bit about how to look at an individual company's earnings report.

But how can you analyze earnings season as a whole? 

You often hear people say things like "earnings growth is slowing," but that's not very helpful without actual data.

Investment banks, financial data providers, and media outlets track earnings results in aggregate, and publish in-depth statistics about each earnings season. 

FactSet Data Systems provides in-depth analysis every week during earnings season, sharing numbers like:

  • The percentage of S&P 500 companies beating and missing earnings and sales estimates
  • Comparisons with historical earnings growth trends
  • A sector-by-sector breakdown of earnings performance
  • How analysts are revising their earnings estimates
  • How stocks are valued in light of expected earnings growth
  • And more!

Please note: you'll have to subscribe to FactSet's email updates to get their full reports, but it's worth it!

How To Trade Earnings

Many traders simply buy call or put options ahead of earnings reports in the hopes of catching a big move up or down.

However, there is a problem with this approach.

Options are very expensive ahead of earnings, which makes it difficult to get a good return on them.

Look at this chart of Facebook's (FB) at-the-money $205 call options ahead of its July 2019 earnings report.

The bars represent the price, while the purple line represents implied volatility. (implied volatility is a measure of how expensive an option is)

And as you can see, implied volatility was extremely high ahead of earnings, and the price of the option collapsed after the report.

T3 Live Director of Education Sami Abusaad has developed an entirely new approach to trading earnings, which he teaches in his Earnings Engine course.

You're about to get a sneak preview of it right now!

A Preview of Sami Abusaad's Earnings Engine Course

(Sami teaching at the Active Trader Summit in New York City)

Sami spend 7 years observing stocks' reactions to earnings before formally unveiled his 'Earnings Play' strategy,  which is taught in his Earnings Engine course.

Earlier, we talked about how a stock's earnings reaction can be affected by all these factors:

  • Earnings per share (relative to expectations)
  • Sales (relative to expectations)
  • Profit margins (relative to expectations)
  • Product unit sales (relative to expectations)
  • The company's future outlook (relative to expectations)
  • Comments made by executives on the conference call
  • How much the stock is up or down before earnings

As you might imagine, trying to predict all of these items is nearly impossible -- especially since you can never know how much the market values each one of them!

Sami only cares about one thing: the stock's chart pattern, which represents investors' expectations about the report.

Believe it or not, Sami doesn't care about the earnings reports themselves, and never reads them!

He only wants to know one thing: are expectations too high or too low?

That's what the Earnings Play is all about. It's about shorting when expectations are too high, and buying when expectations are too low.

Here's a video discussing a particularly successful day of trading earnings:

Earnings Play Basics

While there are actually 6 variations on the Earnings Play, they all rely on a simple principle: identifying "momentary panic."

Please note that this panic can come in the form of traders aggressively buying or selling stocks into earnings.

Sami only cares about one thing: the stock's chart pattern, which represents investors' expectations about the report.

Believe it or not, Sami doesn't even care about the earnings reports themselves, and never reads them!

He only wants to know one thing: are expectations too high or too low?

That's what the Earnings Play is all about. It's about shorting when expectations are too high, and buying when expectations are too low.

While there are actually 6 variations on the Earnings Play, they all rely on a simple principle: identifying "momentary panic."

"Momentary Panic" comes in 2 forms:

1) Panic Buying Ahead of Earnings (sets up shorts)

2) Panic Selling Ahead of Earnings (sets up longs)

So on the short side, Sami looks for weak stocks that have panic buying pre-earnings.

Here's an example of a short:

And on the long side, Sami looks for strong stocks that have panic selling before earnings.

Here's an example of a long:

Sami's Earnings Play Checklist

To close out the article, we'll list some of Sami's key principles for trading earnings:

  • You can't predict all of a company's fundamentals, so don't try to
  • Focus on predicting the reaction
  • Do not get long strong stocks that are bid up into earnings (expectations are too high) 
  • Do not short weak stocsk that drop into earnings (expectations are too low)
  • Resist the urge to trade options ahead of earnings because they are very epxensive
  • Check Out Earnings Engine!

Interested in learning Sami's unique method for trading earnings?

Leave a Comment:

2 comments
Dean says July 28, 2019

Good ideas

Reply
Simon Njihia says August 1, 2019

I would like to know more about trade.

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