Thursday, November 09, 2006

How to Play Earnings

Earnings season is a pivotal time for stocks. Quarterly earnings articulate prior success and future growth of companies. Thus, earnings season is a perfect opportunity to make some quick money. So let's learn how to make the most out it.

1. Look up what companies are reporting and when they are reporting (http://biz.yahoo.com/research/earncal/20061109.html). Sites like Yahoo not only show when the company is reporting, but the analyst earnings expectations on the company.

2. Develop a list of potential plays. Develop a list of stocks that are scheduled to report in the following week or later. Limit your list to companies that you have some knowledge about and are confident that they may have had a good quarter.

3. Piggy back on competitors. From your list, use Google Finance to locate your picks’ core competitors. See if any of your picks’ competitors have already reported their earnings. A stock is much more lucrative is its competitors have beat the street. Analysts are industry whores; a significant amount of their estimates are derived from the industry's success. Look at your list again and keep the companies with successful competitors.

4. Diversify your picks and buy them early. Buy your stocks a week or so before they report. There is a significant amount of traders that trade like crazy a day or two before earnings. If the stock is popular, there is a strong potential that it will be overbought going into earnings. An overbought stock will significantly reduce the potential capital gains from the report, but will escalate the value of the stock in the days prior to the earnings. Finally, diversify your picks. Like all stocks, strong diversification significantly reduces unsystematic risk, yielding safer earnings plays. I reduce risks on earnings plays whenever I can, diversification is a good way to do this.

I have had good luck on earnings using these strategies. Good luck!

1 comment:

This Is What I Say said...

Praise the Rick

MacGuidwin 1:1