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How to Profit from Earnings Roulette

By Jeff Clark
Thursday, February 15, 2007

Holding a trade through an earnings announcement is always a gamble.
 
The company could blow away expectations and see its stock skyrocket. Or maybe the market has already factored that in, and the stock falls instead.
 
The company could disappoint Wall Street and watch its stock collapse. Or maybe the stock is already "sold out" and it actually rallies on the bad news.
 
My point is that, most of the time, betting on how a stock will react to an earnings announcement is no better than betting on black or red at the roulette table.
 
But every once in a while, the market provides clues that can help shift the odds in our favor. Take Weight Watchers (WTW) for example...
 
Last week, I wrote about the seasonal patterns that typically make WTW a "sell" this time of year. I also pointed out that Wall Street didn't look too kindly on the revenue guidance from WTW's chief competitor, NutriSystem. And, when you combined those clues with WTW's plump valuation, it set up a trade that favored the downside.
 
Yesterday, Weight Watchers reported earnings and a weak 2007 profit forecast... and promptly dropped 9% on the news.
 
 
Last week, we also got some pretty good clues from nanotech specialist FEI Corp. (FEIC).
 
FEIC reported fabulous numbers, and Wall Street rewarded the stock by pushing it sharply higher. I wrote that this was a good sign for the rest of the nanotechnology sector and in particular for one stock that was scheduled to announce earnings yesterday.
 
That stock is now 8% higher than where it was last week.
 
Trading stocks through earnings will always be a bit of a gamble. But by paying attention to seasonal patterns, and by exploring a stock's relative valuation for signs of excessive optimism or pessimism, you can shift the odds in your favor.
 
But the absolute best way to beat the house in this game of earnings roulette is to watch how investors treat other stocks in the same industry.
 
It's a pretty good bet they treat your stock the same way.
 
Best regards and good trading,
 
Jeff Clark




Market Notes
A big, broad new highs list: Bayer (pharma), Diageo (booze), Mittal (steel), Lockheed Martin (aerospace), DuPont (chemicals), JPMorgan (banking), CBS (broadcasting), Cummins (engines).
 
Country specific ETFs at new highs: Australia, Italy, Germany, Belgium, Netherlands, Spain, France, Mexico.
 
Earnings today: Chipotle, Diageo, EnCana.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1221.53 +1.3% +10.1%
Oil 38.31 +1.4% -0.6%
Gold 138.07 +2.1% +16.3%
Silver 28.60 +2.4% +53.6%
US-Dollar 80.67 -0.8% +8.1%
Euro 1.32 +0.6% -12.1%
Volatility 18.01 -7.1% -19.8%
Gold Stocks 581.56 +3.0% +17.0%
10-Year Yield 3.02 +0.7% -10.7%

World ETFs
Symbol Price
Change
52-Wk
USA 122.89 +0.3% +11.3%
Canada 30.50 +0.2% +16.2%
Russia 21.94 +1.4% +18.1%
India 37.85 +0.3% +22.3%
Israel 16.69 +1.3% +10.8%
Japan 10.64 +0.6% +6.5%
Singapore 13.73 -1.1% +18.8%
Taiwan 14.78 +0.4% +19.2%
S. Korea 57.31 +1.3% +23.4%
S. Africa 71.87 +1.4% +28.2%
China 44.42 -1.4% -0.6%
Lat.America 53.17 +0.7% +8.4%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 137.59 +1.0% +18.9%
Big Pharma 64.14 +0.0% -3.2%
Internet 72.07 -0.1% +23.4%
Semis 16.22 +1.2% +29.4%
Utilities 31.28 +0.2% +1.5%
Defense 18.52 +0.1% +10.6%
Nanotech 10.03 +0.4% +1.6%
Alt. Energy 10.08 +1.3% -3.3%
Water 18.49 +1.0% +14.5%
Insurance 16.14 +0.4% +21.1%
Biotech 20.54 -0.2% +28.1%
Retail 19.70 +0.3% +30.2%
Software 24.79 +0.8% +25.9%
Big Tech 53.87 +0.3% +22.7%
Construction 13.10 +0.9% +15.7%
Media 13.64 +0.5% +26.0%
Consumer Svcs 67.39 +0.2% +24.5%
Financials 55.04 +0.3% +7.4%
Health Care 64.30 +0.1% +2.0%
Industrials 63.54 +0.5% +21.0%
Basic Mat 74.35 +1.1% +25.3%
Real Estate 55.32 +0.1% +25.0%
Transportation 91.77 +0.7% +26.9%
Telecom 22.59 +0.5% +17.8%

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