The daily deluge in earnings season can be overwhelming and truthfully there are only a few data points that are important and worthy of your time…
The Heartbeat of Earnings and Revenue Data
Each quarter the earnings and revenue data fundamental drives the performance of stocks and has a significant impact on share prices. This highly anticipated information is scrutinized by nearly everyone and is used to evaluate corporate performance and the data is used to determine the health of the stock.
Although media makes a huge deal out of earning reports the reality is that the market often prices in the earnings and revenue expectations with little reaction if they are near consensus estimates.
Savvy traders know that price action is impacted by opinions prior to the number, reaction to the actual data release, and to the future financial outlook guidance.
There are Three Phases of Quarterly Data:
1) Prior to Release – Stocks can move in anticipation of the actual data. Whisper numbers and unusual options activity often are a TELL of what the insiders think they know. The price action prior may reflect market participants positioning OR profit taking/short covering ahead of the data.
2) Reaction to Reality– The hard data of Earnings Per Share and Revenue is instantly compared to analyst estimates. A Street beat, meet or defeat pushes prices if different than expected.
3) Future Guidance– Adjustments to previous forecasts by the company are closely watched by investors. A pattern of lowering expectations so that the expectation bar to hurdle is low next quarter has become commonplace.
Want to know what I do to predict a stock move before an earnings report… It’s really simple but very effective…
I go to the options and check in on the action of the nearest term expiration. I take a look at the call and the put prices (Straddle) and if the calls are overvalued more than the puts than their is bias the market is going to go up. If the puts are showing a ton of volume and the prices are higher than the puts, I expect that stock to sell off.
Then, to get Take the stock price and divide by the At The Money Call and Put straddle premium.
This technique is the percentage measured move (not direction, either up or down) priced in.
Revenue numbers have become increasing important with the recent history of many companies consistently beating EPS. The bottom line growth in sales has not been as robust. Misses on revenue have become more commonplace though EPS typically achieves expectations.
More times than not, the market moves along its merry way not surprised by earnings or revenue data… just be aware of quarterly news (hype) and use my favorite technique to get you the insight you need to be a better trader.