Day Trading Earnings Surprises Profitably Updated 5.22.07
My mission since March 2006 has been to develop a reliable system to make some loot day trading the earnings surprises. This can be a very difficult thing if you don't trade after hours/pre-market. Please note you will need BOTH fundamental and technical analysis to profit successfully. I use all of these strategies to locate good open market plays for our readers at http://www.infinitistocks.com
FUNDAMENTALS - WHAT MAKES A "GOOD" EARNINGS SURPRISE? In general, any two of the following must apply:
1. Non-GAAP EPS beats analyst estimates (don't be fooled by GAAP if non-GAAP is listed). In short, non-GAAP means one-time expenses like stock compensation or discountinued operations are removed from EPS figures.
2. Forward EPS and/or revenue guidance is raised about analyst estimates.
3. A share buyback is planned.
NOTES ON DECIPHERING COMPANY EARNINGS PRs: Ignore them because they're often loaded with hype. I prefer to read the reviews by AP and MarketWatch, which will usually appear at Yahoo shortly after the company press release. Ignore Reuters, it's only rarely that they offer any true analysis of earnings. The analysts will tell you everything you need to know: GAAP vs. non-GAAP vs. estimates, revs vs. estimates, and forward guidance vs. estimates.
If you don't see any analysts weighing in, read the company PR, then click on "Analyst Estimates" at Yahoo. There you will see the EPS and revenue figures expected by the major analysts. Generally these are non-GAAP - exactly what you are looking for. Make sure you find a non-GAAP EPS (excludes one-time charges) in the company PR tfor proper comparison.
TECHNICAL SIGNALS - VERIFY THIS THING IS TRADABLE! What I've seen during the past year is that stocks between $10-50 (in general) tend to run well in open session trading after an earnings surprise. Any two of the following must apply:
1. The chart is in an extended downtrend;
2. A small peak appears in the downtrend, then a selloff, about a week prior to the surprise. This pattern looks like a "mini-mountain".
3. After hours/pre-market trading is within 10-15% of the previous day's close.
BE CAREFUL WITH STOCKS ABOVE $50 Stocks in this range with earings surprises become much harder to play profitably in the open session. This is where Smart Money (brokers, funds, congressmen) plays. They have all the inside data, and they've probably known about the good news for weeks. it's not real easy to compete against that, because they'll sell into the strength on the open.
AVOID BIG NAME STOCKS LIKE CSCO, AAPL, DELL, etc. These are also the feeding ground of Smart Money, who have automated platforms and/or a crew that trade for them.
TIMING Do whatever it takes to get in at the open. The initial run generally lasts only the first half-hour or so (sometimes just a few minutes!), with a possible bounce shortly thereafter. You may also choose to load again on the first pullback from the HOD. If you like a company's earnings and want to go long, suggest you wait three days before before entering the stock.
PROFITS It is reasonable to expect 3-15% on the open market using the above criteria. Generally I've notice the reliable range is between 4% - 8%. I would estimate my success rate with this system runs between 75% - 80%.
Good stocks are obvious. Extensive DD is how you convince yourself to buy a bad one.