Here's your table of contents:<\/p>\n
What Is Earnings Season?<\/h2>\n
Before you can understand how to trade during earnings season, you need to understand what earnings season is.<\/p>\n
Earnings season is when the bulk of publicly-traded companies deliver their quarterly earnings reports.<\/p>\n
These reports contain a variety of financial information on the business\u2019s performance in the previous quarter, typically including (but not limited to):<\/p>\n
- \n
- Balance Sheet<\/span><\/li>\n
- Income Statement<\/span><\/li>\n
- Cash Flow Statement<\/span><\/li>\n
- Other helpful facts and figures, like performance of certain business units and products.<\/span><\/li>\n<\/ul>\n
Stocks tend to have big movements upon the release of earnings reports because investors make new decisions about each company's future.<\/p>\n
An earnings report can make you encouraged, discouraged, or even indifferent about a stock's prospects.<\/p>\n
When Is Earnings Season?<\/h2>\n
![\"\"](\"https:\/\/www.t3live.com\/blog\/wp-content\/uploads\/2019\/07\/calendar2.jpg\" "\\"calendar2\\"")
<\/span><\/p>\nThere is no official earnings season.<\/p>\n
Historically, traders considered aluminum company Alcoa's <\/strong>(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.<\/p>\n
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<\/strong>Morgan <\/strong>(JPM) and Bank of America<\/strong> (BAC) report earnings.<\/p>\n
Earnings season activity peaks about 2 weeks after that, when a cluster of tech companies like Amazon <\/strong>(AMZN) and Intel <\/strong>(INTC) report.<\/p>\n
At the peak, over 150 companies report earnings in a single day.<\/p>\n
Then, the frequency of earnings reports declines for another 4 weeks, upon which earnings season is more or less over. <\/p>\n
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.<\/p>\n
For example, Nike <\/strong>(NKE) operates on a May fiscal year, so it does not deliver its quarterly reports during earnings season.<\/p>\n
Why You Should Care About Earnings Season<\/h2>\n
![\"\"](\"https:\/\/www.t3live.com\/blog\/wp-content\/uploads\/2019\/07\/jump1.jpg\" "\\"jump1\\"")
<\/span><\/p>\nEarning Season action is different than regular market action.<\/p>\n
Since there's so much important news being released, stocks bounce around like crazy.<\/p>\n
And remember, a company's earnings report can affect multiple stocks.<\/p>\n
For example, when Apple <\/strong>(AAPL) reports earnings, it has a huge impact on the entire tech sector, and especially its suppliers.<\/p>\n
How to Find Out When a Company Reports Earnings<\/h2>\n
The single best way to find out when a company reports earnings is to go to the investor relations section of its website.<\/p>\n
Companies typically issue press releases with the official earnings date and time.
![\"\"](\"https:\/\/www.t3live.com\/blog\/wp-content\/uploads\/2019\/07\/beyondmeatrep.jpg\" "\\"beyondmeatrep\\"")
<\/span><\/p>\nYou can also find a company's earnings date on hundreds of websites including Yahoo! Finance<\/u><\/strong><\/a> and Nasdaq.com<\/u><\/strong><\/a>.<\/p>\n
However, if a company has not yet announced an official earnings date, it will be estimated based on historical norms. <\/p>\n
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<\/strong> (NFLX) always reports after the market close about two-and-a-half weeks following the end of the calendar quarter.<\/p>\n
About Earnings Report Releases and Conference Calls<\/h2>\n
Earnings reports are typically posted on a company's website, and also distributed via press release. <\/p>\n
Management will then hold an earnings call about 30-60 minutes after the release. <\/p>\n
![\"\"](\"https:\/\/www.t3live.com\/blog\/wp-content\/uploads\/2019\/07\/telephone.jpg\" "\\"telephone\\"")
<\/span><\/p>\nAn earnings call typically starts with prepared comments from the company's CEO or CFO, followed by a Q&A session with Wall Street analysts.<\/p>\n
They tend to last about an hour.<\/p>\n
You can listen to these calls live, or catch replays after. And several online publishers including Seeking Alpha actually provide transcripts<\/u><\/strong><\/a> of the calls.<\/p>\n
Keep in mind that some companies will announce guidance during a call, instead of in the actual earnings release. <\/p>\n
How to Find Consensus Earnings and Sales Estimates<\/h2>\n
Earnings don\u2019t just exist in a vacuum.Wall Street analysts from firms like Morgan Stanley<\/strong> (MS) and Goldman Sach<\/strong>s<\/strong> (GS) will forecast a company\u2019s performance \u200bbased on in-depth research.<\/p>\n
Investors pay most attention to analysts' forecasts of the following items:<\/p>\n
- \n
- Earnings per share<\/span><\/li>\n
- Sales<\/span><\/li>\n
- Profit margins<\/span><\/li>\n
- Unit sales<\/span><\/li>\n<\/ul>\n
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.<\/p>\n
Like with earnings calendars, These consensus estimates are widely available online.<\/p>\n
Here's a section from Reuters' listing<\/u><\/strong><\/a> of estimates for Apple <\/strong>(AAPL):<\/p>\n
![\"\"](\"https:\/\/www.t3live.com\/blog\/wp-content\/uploads\/2019\/07\/reutersaapltrend.jpg\" "\\"reutersaapltrend\\"")
<\/span><\/p>\nReuters lists the sales and earnings per share estimates by quarter, along with how those estimates have been treding.<\/p>\n
Traders like to see how a company's reported results compare with these consensus estimates.<\/p>\n
But beware — a company can beat earnings estimates and see its stock drop.<\/p>\n
For example, Marketwatch reported<\/u><\/strong><\/a> that Johnson & Johnson fell despite strong earnings and guidance:<\/p>\n
![\"\"](\"https:\/\/www.t3live.com\/blog\/wp-content\/uploads\/2019\/07\/jnjboost.jpg\" "\\"jnjboost\\"")
<\/span><\/p>\nHow Earnings Reports Affect Stock Prices<\/h2>\n
![\"\"](\"https:\/\/www.t3live.com\/blog\/wp-content\/uploads\/2019\/07\/formula.jpg\" "\\"formula\\"")
<\/span><\/p>\nThe impact of earnings on a stock price is not an exact science.<\/p>\n
Here is a small selection of the factors that can impact a stock's reaction to earnings:<\/p>\n
- \n
- Earnings per share (relative to expectations)<\/span><\/li>\n
- Sales (relative to expectations)<\/span><\/li>\n
- Profit margins (relative to expectations)<\/span><\/li>\n
- Product unit sales (relative to expectations)<\/span><\/li>\n
- The company's future outlook (relative to expectations)<\/span><\/li>\n
- Comments made by executives on the conference call<\/span><\/li>\n
- How much the stock is up or down before earnings<\/span><\/li>\n<\/ul>\n
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?<\/p>\n
Why?<\/p>\n
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.<\/p>\n
For example, if a stock runs higher into earnings, it signals that expectations are very high.<\/p>\n
So a strong report may be priced in, reporting in a “sell the news” reaction.<\/p>\n
How to Judge Earnings Season as a Whole<\/h2>\n
![\"\"](\"https:\/\/www.t3live.com\/blog\/wp-content\/uploads\/2019\/07\/judge.jpg\" "\\"judge\\"")
<\/span><\/p>\nWe talked a bit about how to look at an individual company's earnings report.<\/p>\n
But how can you analyze earnings season as a whole? <\/p>\n
You often hear people say things like “earnings growth is slowing,” but that's not very helpful without actual data.<\/p>\n
Investment banks, financial data providers, and media outlets track earnings results in aggregate, and publish in-depth statistics about each earnings season. <\/p>\n
FactSet Data Systems provides in-depth analysis every week<\/u><\/strong><\/a> during earnings season, sharing numbers like:<\/p>\n
- \n
- The percentage of S&P 500 <\/strong>companies beating and missing earnings and sales estimates<\/li>\n
- Comparisons with historical earnings growth trends<\/li>\n
- A sector-by-sector breakdown of earnings performance<\/li>\n
- How analysts are revising their earnings estimates<\/li>\n
- How stocks are valued in light of expected earnings growth<\/li>\n
- And more!<\/li>\n<\/ul>\n
Please note: you'll have to subscribe to FactSet's email updates to get their full reports, but it's worth it!<\/p>\n
How To Trade Earnings<\/h2>\n
Many traders simply buy call or put options ahead of earnings reports in the hopes of catching a big move up or down.<\/p>\n
However, there is a problem with this approach.<\/p>\n
Options are very expensive ahead of earnings, which makes it difficult to get a good return on them.<\/p>\n
Look at this chart of Facebook's <\/strong>(FB) at-the-money $205 call options ahead of its July 2019 earnings report.<\/p>\n
![\"\"](\"https:\/\/www.t3live.com\/blog\/wp-content\/uploads\/2019\/07\/fb-iv-earnings.png\" "\\"fb-iv-earnings\\"")
<\/span><\/p>\nThe bars represent the price, while the purple line represents implied volatility. (implied volatility is a measure of how expensive an option is)<\/p>\n
And as you can see, implied volatility was extremely high ahead of earnings, and the price of the option collapsed after the report.<\/p>\n
T3 Live Director of Education Sami Abusaad has developed an entirely new approach to trading earnings, which he teaches in his Earnings Engine course.<\/p>\n
You're about to get a sneak preview of it right now!<\/p>\n
A Preview of Sami Abusaad's Earnings Engine Course<\/h2>\n
![\"\"](\"https:\/\/www.t3live.com\/blog\/wp-content\/uploads\/2019\/07\/sami-teaching.jpg\" "\\"sami-teaching\\"")
<\/span><\/p>\n(Sami teaching at the Active Trader Summit in New York City)<\/em><\/p>\n
Sami spend 7 years observing stocks' reactions to earnings before formally unveiled his ‘Earnings Play' strategy, which is taught in his Earnings Engine course.<\/p>\n
Earlier, we talked about how a stock's earnings reaction can be affected by all these factors:<\/p>\n
- \n
- Earnings per share (relative to expectations)<\/span><\/li>\n
- Sales (relative to expectations)<\/span><\/li>\n
- Profit margins (relative to expectations)<\/span><\/li>\n
- Product unit sales (relative to expectations)<\/span><\/li>\n
- The company's future outlook (relative to expectations)<\/span><\/li>\n
- Comments made by executives on the conference call<\/span><\/li>\n
- How much the stock is up or down before earnings<\/span><\/li>\n<\/ul>\n
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!<\/p>\n
Sami only cares about one thing: the stock's chart pattern, which represents investors' expectations about the report.<\/p>\n
Believe it or not, Sami doesn't care about the earnings reports themselves, and never reads them!<\/p>\n
He only wants to know one thing: are expectations too high or too low?<\/p>\n
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.<\/p>\n
Earnings Play Basics<\/h2>\n
While there are actually 6 variations on the Earnings Play, they all rely on a simple principle: identifying “momentary panic.”<\/p>\n
Please note that this panic can come in the form of traders aggressively buying or selling stocks into earnings.<\/p>\n
Sami only cares about one thing: the stock's chart pattern, which represents investors' expectations about the report.<\/p>\n
Believe it or not, Sami doesn't even care about the earnings reports themselves, and never reads them!<\/p>\n
He only wants to know one thing: are expectations too high or too low?<\/p>\n
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.<\/p>\n
While there are actually 6 variations on the Earnings Play, they all rely on a simple principle: identifying “momentary panic.”<\/p>\n
“Momentary Panic” comes in 2 forms:<\/p>\n
1) Panic Buying Ahead of Earnings (sets up shorts)<\/p>\n
2) Panic Selling Ahead of Earnings (sets up longs)<\/p>\n
So on the short side, Sami looks for weak stocks that have panic buying pre-earnings.<\/p>\n
Here's an example of a short:<\/p>\n
![\"\"](\"https:\/\/www.t3live.com\/blog\/wp-content\/uploads\/2019\/07\/Sami-Abusaad-Earnings-Webinar-July-2019-1.png\" "\\"Sami")
<\/span><\/p>\nAnd on the long side, Sami looks for strong stocks that have panic selling before earnings.<\/p>\n
Here's an example of a long:<\/p>\n
![\"\"](\"https:\/\/www.t3live.com\/blog\/wp-content\/uploads\/2019\/07\/Sami-Abusaad-Earnings-Webinar-July-2019.png\" "\\"Sami")
<\/span><\/p>\nSami's Earnings Play Checklist<\/h2>\n
To close out the article, we'll list some of Sami's key principles for trading earnings:<\/p>\n
- \n
- <\/span>You can't predict all of a company's fundamentals, so don't try to<\/span><\/li>\n
- <\/span>Focus on predicting the reaction<\/span><\/li>\n
- <\/span>Do not get long strong stocks that are bid up into earnings (expectations are too high) <\/span><\/li>\n
- <\/span>Do not short weak stocsk that drop into earnings (expectations are too low)<\/span><\/li>\n
- <\/span>Resist the urge to trade options ahead of earnings because they are very epxensive<\/span><\/li>\n
- <\/span>Check Out Earnings Engine<\/u><\/strong><\/a>!<\/span><\/li>\n<\/ul>\n
- <\/span>Focus on predicting the reaction<\/span><\/li>\n
- Sales (relative to expectations)<\/span><\/li>\n
- Sales (relative to expectations)<\/span><\/li>\n
- Sales<\/span><\/li>\n
- Income Statement<\/span><\/li>\n