Perhaps you think it's impossible to score another 1,000% gain off this "tech titan" stock. Think again. An unusual strategy lets you virtually "recreate" gains off the biggest companies you thought had come and gone. CLICK HERE to see how it works.
Earnings Reports: 3 Stand-Out Stocks & The Post Earnings Announcement Drift
by Matthew Weinschenk, Senior Analyst, The White Cap Report
Thursday, June 11, 2009: Issue #1016
Editor’s Note: In a recent article, Matt Weinschenk showed White Cap subscribers an easy way to sort through the earnings reports that have been coming out. We’re republishing it here because following earnings is a key concept in our Investment U course and Matt gives us his insight on taking advantage of them…
Investors eyed this batch of quarterly earnings with more anticipation and scrutiny than any in recent memory. And who can blame them, really?
With a recession in full swing, companies lining up for government bailouts and economists taking to the streets of New York with “The End is Near” sandwich boards, nobody knew what to expect.
Earnings reports, however, tell the real, unabridged story of what’s happening with America’s businesses…
So now that most of the numbers are out, what did we learn? And more importantly, how can we profit from it moving forward?
It depends on how you slice the data…
Who’s Really Beating Earnings Report Estimates?
Had we limited our earnings report focus to the early-reporting S&P 500 companies, our level of pessimism may have seemed overdone. After 108 companies reported, total earnings beat estimates by 20%. But don’t celebrate just yet.
After 455 companies in the S&P 500 reported, it wasn’t pretty. According to numbers provided by Standard and Poor’s, total earnings were 25% below estimates. And only 37% of companies beat Wall Street’s expectations.
Now, don’t forget, we’re not talking about growing earnings over last quarter or last year – that wasn’t even considered as a possibility. We’re talking about beating the watered-down earnings report estimates of analysts who had taken into account all of the unfavorable economic news.
Sounds bad, eh? Not necessarily.
You see, if we broaden our scope to include almost 2,000 companies, as Bespoke Investment Group did, we get a much more optimistic view.
Only 37% of the S&P 500 managed to trump analyst expectations, however, 62% of the companies in Bespoke’s universe did beat estimates (commonly called the “beat rate”). That’s better than the average beat rate since 1998 (61%) and a big jump from last quarter (55%).
With small cap investing, we’re much more interested in the overall beat rate than the S&P beat rate, anyway. Remember, the S&P 500 tracks the country’s 500 largest stocks.
Of course, the markets get to cast the final vote on earnings. When it comes to small caps – despite a financial crisis and a recession – this earnings season has, so far, seen a 40.2% rally in the Russell 2000. If that’s not a sign of confidence, I don’t know what is.
So, there is hope for corporate earnings, particularly for small caps.
But how can we turn that into profits sooner rather than later? The same way we always can, with a phenomenon called the “post earnings announcement drift” (or PEAD).
The Post Earnings Announcement Drift (PEAD): An Anomaly With Regularity
After a stock announces an earnings report surprise, it has a strong and documented tendency to outperform the market over the next few quarters. Thus, it warrants our undivided investment attention.
And for the record, this effect isn’t in question. Respected researchers like S.P. Kothari of M.I.T. concluded that, “The PEAD anomaly poses a serious challenge to the efficient markets hypothesis. It has survived a battery of tests and many other attempts to explain it away.”
Most questions now revolve around why it happens and not if.
Since there are an infinite number of ways to quantify the effect of PEAD, there’s no single number to explain exactly how much outperformance to expect. One summarization, by Jack Hough of The Wall Street Journal, claims, “The top 20% in terms of upside surprises beat the broad market by three percentage points over the next six months.”
That might not seem like a lot, but it adds up.
You can keep track of earnings report surprises easily by navigating on the web to http://biz.yahoo.com/r/ (just click on “Surprises”).
And if we get more stringent with our stock search, filtering for additional properties like:
- Revenue surprises,
- Low institutional ownership,
- Analyst experience,
- And arbitrage risk…
Then it stands to reason that we’ll witness an even higher PEAD and improved results.
So that’s exactly what we did…
Three Stocks That Stand Out This Earnings Report Season
Here are three stocks that stand out above the others from this earnings report season. And if history is any guide, they’ll likely outperform the rest of the market by a wide margin in the weeks and months ahead.
- Enbridge Inc. (NYSE: ENB). Consider this the Kinder Morgan of Canada. It operates a big network of pipelines and has raised stock dividends for 10 straight years.
- Hittite Microwave Corp (Nasdaq: HITT). A leader in the semiconductor industry that specializes in microwave communications, like RFID tags. It only beat estimates by 6%, but the industry suggests growth ahead.
- Millipore Corp (NYSE: MIL). A well-run supplier of medical and scientific technology and tools. Beating quarterly earnings estimates by 26% suggests that it’s a great long-term hold.
Exploiting market anomalies, especially ones that automatically isolate successful companies, is what smart investing is all about.
Good investing,
Matt Weinschenk
P.S. If you’re looking for other ways to isolate successful investments, take a look at Investment U’s new course, “Building a Million-Dollar Portfolio from Scratch.” Inside, Dr. Scott Brown explains exploitable market anomalies that you can consistently exploit for profits, just like post announcing earnings drift.
Today’s Investment U Crib Sheet
We’ve recently received a few questions concerning straddles and strangles from readers. We’ll be adding more information on both over the next few weeks – but in the meantime, here’s a quick difference and why strangles are growing in popularity.
The Bargain Lover’s Alternative to the Straddle
A strangle is set up just like a straddle: You buy one put and one call. And you buy them for the same expiration month. The difference is in the strike prices: strangles have different strike prices, while straddles are the same.
To set up a strangle, you avoid the expensive at-the-money or close-to-the-money strike prices and go for an out-of-the-money one.
Here’s an example. Take a stock at $29.32. This would be a great $30 straddle, you think, but on investigation you find the $30 strike options cost too much. So you go one strike further out each way.
On the downside, you move to a $25 put. On the upside, you move to a $35 call. Now you have loosely surrounded the stock price and you are ready to profit on a breakout in either direction.
A strangle will have a somewhat lower chance of profiting because the stock has to make a bigger move to influence the action in the out-of-the-money strikes. But that’s precisely the reason a straddle will cost too much for popular stocks when they are especially active.
Options expert Karim Rahemtulla recently gave Smart Profits Report readers a good overview on, “The Strangle Options Play: When & How To Use This Trading Strategy.” And earlier this month he showed readers why LEAPS are so popular right now in “Trading Options: The Power of Leverage, Call Options & LEAPS.”
If you have questions you’d like answered, send them to comments@investmentu.com. While we cannot respond to specific inquiries, we will try to see that as many of your questions are answered as quickly as possible.
- The Strangle Options Play: When & How To Use This Trading Strategy
- The Secret to Profiting from Earnings Reports: Buy High… Sell Higher
- Understanding Earnings Surprises: What to Look For & Their Meaning For Investors
|
The Company Set to Dominate a $60 Billion-a-Year Market
$60 billion is spent on cancer treatment in the U.S. - each year. And one company is poised to receive the lion's share of it.
The medical director at the Alta Bates Comprehensive Cancer Center says, "...possibly a third of our cancer patient population will soon be undergoing this [company's] treatment."
Another doctor at the University of Texas MD Anderson Cancer Center says he intends to treat over 1,000 patients a year with this technology.
Here's how you can claim your stake in the company before this cash infusion sends shares soaring.
One Response to “Earnings Reports: 3 Stand-Out Stocks & The Post Earnings Announcement Drift”
Comments
**By submitting your comment you agree to adhere to our Comment Policy and Privacy Policy.Check out our selection of daily Investment Research:
 |
 |
Investment U RSS Feed
June 14th, 2009 at 6:54 pm
Who the heck is manufacturing “Bucky Paper” for the airplane industry? There’s a lot of teasing going on out there and I’m interested to know if this is a viable company in which to invest. Thank-you so much. -Mack
Reply