Sunday, July 7, 2013

Some Recent Earnings Moves to Study as the Season Approaches (Plus a Look at the Week Ahead)

It's that time of year.  Earnings season is about to start and with it will come some very big moves (both up and down) in many, many stocks, some of which you know well and some of which you have never heard.  I thought it would be a good idea to look back at some of the big winners from this past earnings season to get some potential clues as to how to catch and play a few of these big winners going forward.  

If you study the charts below, you will notice a few things.  I included an earnings summary found on Streetinsider.com that I found very useful for comparing the moves these stocks had compared to the reports they put out compared to consensus earnings.  All of these big moves started with a large, mostly unexpected earnings "beat", where the actual EPS was much larger (or in some cases less bad) that was expected by analysts.  In many cases, the stocks shown below also have very high short interest levels which pushed their stock even higher once the move started. 

CCIX
CREE
INFN
INVN
IRBT
LNKD
NFLX
OSTK
TSLA
YRCW
ZLC
Charts from TC2000 and Streetinsider.com

Entering these stocks is always tricky because gaps in the pre-market or after-hours are always difficult to read, even more so in a market where black-boxes and algorithms are having large influences on trading.  In general, I try to wait until a stable pattern has been setup on the pre-market or after-hour five minute charts before taking a shot at entering during one of those two trading periods.  Sometimes this causes a stock to run away from me, but that is something you just have to accept.   In my opinion, it is much better than buying a stock that gaps up 10% as soon as you can in the after-hours session and then watching it reverse to down 10% in a matter of moments.  Give the market a little time to show you that it really does like the earnings and is not just messing around with you.

Here are a few other general observations that I have made over time regarding earnings moves.  Going with stocks that are not as well know and setting up in consolidation patterns from which they can gap up generally give you bigger gains, although these stocks can also reverse easier and leave you with losses.  YRCW is an example of a stock that was not well know, consolidating, and then had a huge gap that ran hard.  On the other hand, stocks that have had two or three earnings gaps in consecutive periods or that are running hard into an earnings release are generally names I try to avoid, as the failure rate on these type of setups are usually much higher. 

Patience is also important with these and this is an area I admittedly struggle at myself.  If you catch one of these names at the right point and they move up quickly, it is easy to get a little scared and sell out, taking a nice 15-20% gain.   Sometimes that actually is the right move (see ACOM back in 2010 I believe), but normally, it will end up hurting you. I caught LNKD at $135 this year and sold a few days later at $160ish.   A great trade but now that it is trading over $200, it doesn't look quite as good.   In general, using the 9 or 20 day EMAs as stop levels work well for these type of trades. 

Don't be scared however to sell out if the trade goes against you.  These trades are not foolproof and most actually do not work well.   If you keep your discipline however, you can usually keep those losses small and by hopefully catching one or two big movers, your account appreciates greatly overall.

In terms of the general market, it's been a pretty typical summer so far filled with low volume, gaps up and down followed by little follow-through one way or the other intraday, and little overall price movement for the indices (Nasdaq up 19 total points since open on June 3).  Friday's action was bullish however in that we didn't see a late fade and the market closed above a key resistance line that hopefully will lead to higher prices.  I don't have my hopes too high because I know how summers are, but I am long several names as of Friday and will hold as I see fit.  

Nasdaq

A few names to watch going forward are listed below.  Good luck.

Charts from TC2000, Courtesy of Worden Brothers, Inc.

1 comment:

Anonymous said...

Thanks Ryan, It is good one.

Your analysis of correlating Earning surprise and follow up price movement. As you mentioned high short interest after first Earning surprise is interesting. I feel watching price action for next couple of weeks for better entry is one option. Other option would be to buy call option a week or two prior to 2nd earning date.

-Vijay