The Investor’s Guide to Earnings Season

Editor's Note: Earlier this week, I had the pleasure of introducing you to expert analysts Landon Swan and Andy Swan, the minds behind founding LikeFolio and Derby City Insights. Much like myself, these innovative thinkers rely on fundamental analysis and complex algorithms to inform their investment approaches. To this end, we have teamed up to present an exclusive event: The A.I. Earnings Predictor Summit , scheduled for Tuesday, January 9, 2024 at 8 p.m. ET. To register for this event, click here. In this article, I am excited to share insight provided by Andy Swan as he unveils the lucrative potential found within the earnings season. You will find his exploration below…

It's not too long before your first chance to reap substantial gains in this year's stock market presents itself, kicking off with the earnings season. The truth is concise and unambiguous: post-earnings announcement, stocks are likely to experience significant price fluctuations. These initial movements, albeit positive or negative, routinely stimulate prolonged rallies or freefalls.

On the less optimistic side, a company reporting decreases in sales or profits, or worse, revising downward its future projections, may instigate a swift decline in its stock value. Conversely, there's a simple to follow "good/better/best" guideline:

Good: the company exceeds sales expectations.
Better: the same company surpasses profit forecasts.
Best: confident company leaders heighten their sales and profit predictions for the future.

Looking for evidence? Observe these recent instances:

Bearish: Last quarter, Tesla (TSLA) failed to meet earnings and revenue expectations, causing a 16% decline in its shares by the week's close following its disappointing October 18 report.

Bullish: Despite falling short of third-quarter predictions on November 29, Dollar Tree's (DLTR) shares saw a nearly 9% increase over the following two days due to modest initial expectations and a satisfactory report.

Featuring the Bullish "Trifecta": November 9 witnessed Duolingo (DUOL) surpass third quarter sales and profit expectations, while also increasing its annual guidance, leading to a 31% surge in its stock over four days and resulting in an all-time high at year's end.

These aren't isolated cases, dozens of studies back these claims, for instance, a paper by the NBER suggests that the days around earnings announcements are marked by unusually high volume and broader price fluctuations, giving the company an "earnings announcement premium."

In simpler terms, when numerous investors rush to trade on newfound valuable information, things tend to escalate rapidly.

Whenever I engage, be it the Kentucky Derby, the Super Bowl or earnings season, I make sure I'm well-prepared. In our renowned Weekly Earnings Scorecard, we condense all consumer sentiment data along with macro trends into our exclusive Earnings Score – a straightforward metric (-100 to +100) indicating whether to be bullish, bearish, or neutral as we move towards the earnings announcement.

Did we develop this based on a racehorse tip sheet? Possibly. But the conceptual point prevails. This tool provides an overview of each company's earnings report and the metrics that matter, acting as a valuable "cheat sheet."

We advance this by incorporating bullish, bearish, or neutral options trading strategies. These approaches are favored as they permit us to undertake a reasonable, clear and limited amount of risk, rather than going long or short on a stock. The balance of risk/reward can be truly enchanting, promising significant rewards limited downside.

Earnings seasons revolve around making informed predictions about whether a company will exceed, meet or fall short of expectations, making these opportunities incredibly rewarding. A crucial step in the earnings trading process involves learning from successful strategies and refining those that fell short.

Keep an eye out for more,

Andy Swan
Founder, LikeFolio