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Earnings Conference Calls
This is a key part of the earnings-season dance that is often ignored
by investors to their detriment. The company's post-report conference
call with analysts and other market insiders is what makes earnings
such a nasty play.
For the most part a stock will move higher as its earnings release
date approaches. During the "earnings run" about three-quarters of
companies considered "good ones" will indeed move somewhat higher in
the week preceding their actual earnings release. As the actual
earnings date comes near, we have a significant problem: Do we hold
through the earnings release hoping that the company will blow away
the numbers and the stock will soar; or do we sell out in case the
numbers are weak?
For years we have preached getting out ahead of the actual release.
About 70% of the time a stock will sell off immediately afterward–
even when the company
meets or exceeds estimates. We have seen that many times during the
current earnings campaign.
Why? First, you get some of the old "buy the rumor sell the
news" theory that comes into play. Second, you never know what is
going
to be said by company officials during the conference call that
follows the earnings release. That's where the rubber meets the road.
We used to see examples of a stock that is expected to make 45 cents
and actually posts 52 cents and they get a big stock drop. The
reason: During the conference call management said something
like, "Going forward we don't think we can sustain the growth level
of the past quarter." That is all traders need to hear. With stocks
priced at high multiples of future sales and earnings, they don't
want to hear anything about future growth being unsustainable.
On the other hand, we have all seen a company actually miss the
estimates but
explain during their call that it was just temporary and that going
forward they expect to increase sales and revenues. The next day the
stock flies. We never really know what is going to be said and
therefore holding a stock through earnings is a poor risk-to-reward
scenario. More times than not the stock is going to drop and you are
going to take a hit.
So our best earnings play is to buy into your favorite company about
5-7 trading days ahead of the actual earnings release and sell out
either the day before or the morning of the actual release (if the
release is scheduled after the close). You may miss some upside, but
you will be spared a severe spanking if they either miss or worse,
say something stupid during the conference call.
If you want to listen to the conference call yourself, go to the
company's web site. They will usually announce the date and time of
the release of the report and where to go to hear the chatter.
http://clix.to/wallmann
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