The key to unhappiness is expectations. At least that is what they say about relationships. The same is true for stock market earnings. The key to an unhappy stock price is unmet expectations on earnings. (I guess that is also true in relationships).
Today I was hoping Shake Shack would perform going into earnings. Although they beat their earnings by 61% the stock still got slammed by as much as 7%. I was glad that I pulled out before the close. #pulloutking
I pulled out because SHAK violated one of my principles. That principle is that I avoid stocks that have great days on the day of earnings. SHAK at one point was up about 3.7% today. Stocks typically vacillate between -1 or +1. Anything outside of that window typically is a “good day”. This meant avoid avoid avoid.
I avoid stocks that have good days on the day of earnings, because earnings are about expectations. Usually you get big swings opposite of the sentiment of the market. This means that if a stock is running people are buying and if people are buying they are going to be disappointed when earnings drop because typically the stock wont perform as well as they thought it would.
On the other hand, if a stock is falling ahead of earnings usually it’s because people have a poor outlook on earnings and then when the company reports its usually not as bad as the haters thought it would be. This causes a rebound or a correction because at that point the stock was either overbought or oversold.
Typically the market doesn’t care if you win or you lose. They don’t care if you post earnings or post a loss. What matters is how you perform in accordance with what the market thinks you are going to do, as judged by your performance against analyst projections. This is then factored into the sentiment that lead up in anticipation of earnings in the first place. It all works together. Earnings are not an isolated event.
That said, when I look at earnings I am looking at a lot of different things. I am looking at:
- How the stock has traded heading into earnings. Is it on an uptrend or down trend. If it is on a trend how long has that trend been running?
- Where the stock in in comparison to its 52 week high. Is it way off, a little off or is it setting new highs?
- The analysts outlook. Do they think they are going to beat earnings? Why or why not? Do they make logical arguments or do they sound ridiculous?
- The quality of the company and what I think their value is. Is it even a good company? Do they have a quality product that people love?
- Whether I think the slander or praise is warranted based on number 5: Are people just being haters or is their product really crap or is their product great and people are just scared (see Chipotle).
Young me thought that you make money on the beat or the miss. Mature me knows that its more complicated than that. It is complicated but it is possible to understand and start to predict with practice. Earnings season creates a unique time to catch big swings in stock prices. Some people avoid it because of the uncertainty, I try to become a master of the uncertainty and make the big money. The last three months I am up 84% so I think I have the hang of this.
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