Earnings Season – How to be an Investor
The earnings season is one of the best periods to trade for day traders. The earning’s season is the period when companies releases their quarterly financial reports. During this period, investors wait for two main things. One, they wait for the company’s performance during the quarter. In this, they look at the company’s revenues and the earnings per share (EPS). Second, they look at the company’s projection. Projections are what the company’s executives expect the company to make based on the past quarter. In the earning’s season, it is expected that a company that performs well will see a hike in the share price. However, a company that does well but projects lower revenues will have its share price slashed. Here are a number of ways to make a fortune during this season.
#1 – Know the Companies Reporting
The first thing you need to do to make a fortune during the earnings season is to know the companies that will be reporting. In the past, this information belonged to the hedge funds and the huge media houses. Today, the information has been decentralized and the list of companies reporting is visible to all people. The earnings calendar provided by investing.com is one of the most comprehensive one and I recommend it. It presents all the companies that will report, their previous earnings, the forecasts, and the timing of the forecasts. Most times, companies report before the market closes or after it opens. If a company reports positive numbers before the market opens, you should place a buy position and exit it a few minutes after the open.
#2 – Estimates
The next thing you need to know about the earnings season is on the estimates. Analysts from major banks and investment funds research various companies and create their estimates. These estimates are known as the Wall Street estimates. Today, it is also possible to find estimates from ordinary traders through a tool known as Estimize. Estimize is a tool that allows any person to place his estimates on a company’s earnings. Historically, the Estimize predictions have been more successful than those by Wall Street.
#3 – Understand the Parameters
It is also very important to understand the parameters used by investors per company. Investors don’t only look at the earnings and the projections. In many cases, they look at a number of underlying numbers. A good example is in a company such as Facebook or Twitter. While the revenues and the Earnings Per Share (EPS) matter, investors look at other numbers such as MAU (Monthly Active Users). They consider whether the company has increased the number of users or not. This number is usually important because it gives them an idea of future revenues of the company. For a company such as Amazon, investors look at the margin. Is it increasing or falling?
#4 – Use a Company to Predict Another Company
In many cases, companies in the same industries will have similar results, all factors held constant. The chart below shows the performance of three banks: Goldman Sachs, Bank of America, and Citi. As you can see, the banks tend to move in the same direction.
As a trader, this information is very important because the companies do not report on the same day. To leverage on this, if Goldman Sachs reports strong quarterly numbers, chances are that Citi will also have strong numbers. Therefore, you can place a buy position for Citi and look closely when the company announces. If the numbers are good, you should hold them for a few minutes and exit. Exiting will help you reduce the chances of making a big loss once other investors start to take their profits. The same is true for companies such as Coca-Cola and Pepsi.
#5 – Know when to Exit
Finally, you need to know when to exit. In many cases, when a company announces excellent results, traders like to buy and hold the company. This is usually a big mistake especially for traders who just want to cash in during the event. The disadvantage of holding such a position is that investors will tend to take their profits which will take price down. This downward move can take a few days before a recovery is experienced. Therefore, I advise that you exit the trade after making some profit and then going on to other companies. This is also amplified by the fact that most of the trading is done by electronic bots.
Earnings Season – Useful Links
- Find the definition of Earnings Season on Investopedia
- Discover how to trade “The Dog of the Dow” during the Earnings Season on Forbes