There’s nothing better than waking up to a positive earnings surprise and big profits on a stock you own. And there’s nothing worse than waking up to an earnings miss and heavy losses in your portfolio. Just ask my brother-in-law.
Cases in point. Wednesday morning, Iamgold, IMG, and Valeant Pharmaceutical, VRX, both had positive third-quarter earnings along with other good news Their stock prices soared 6.80% and 5.03% respectively. Linamar, LNR, on the other hand, missed third-quarter profit expectations and provided a gloomy outlook with NAFTA looming as a dark cloud. Its stock price was punished 13.88%, giving back in one day all the gains it had made since early August.
What is earnings anyway? An earnings report is provided by a public company four times a year. It typically summarizes performance, strategy, and corporate changes that have taken place the last 3 months. A forward-looking ‘outlook’ statement is often included. Better than expected earnings can cause price to gap up and continue rising in the days and weeks ahead. Negative earnings and/or a negative outlook can cause a gap down which often continues until a bit of good news comes along or price has fallen so far that the stock is attractive again from a value perspective. You can find earnings release dates on your brokerage site or others such as www.investing.com and www.tmxmoney.com. So what is an investor supposed to do during earnings?
Here are 6 Strategies to Help You Reduce Risk and Profit during the rest of this earnings season and the next ones.
- Don’t buy a stock just before earnings. Why take the risk? A safer approach is to wait for the report and buy on good earnings, but only if the stock is behaving as it should.
- If you own the stock and you have a small gain or a loss, the safest option is to exit 100% of your position before earnings. You can always buy back in.
- If it’s a stock you have owned for some time and you have a nice gain, you might reasonably choose to weather the storm. However, if VectorVest fundamentals of RS, RV, EPS and GRT are weakening, if Relative Timing is steadily falling, and especially if VectorVest has assigned a SELL REC, you need to consider whether there are enough positives to hold through earnings.
- Stop the bleeding! Sell all companies with a serious negative earnings surprise, even if you must take a substantial loss. Why? Better to take a 5-10% loss in the short run than a 20% loss or more in the long run. Consider LNR. Price gapped down Wednesday to open at $70.20 before closing at $66.24. Investors who reacted quickly could have gotten out at $70 or $69 in the first 20 minutes, before the slide began in earnest.
- Looking for an aggressive trade with cash you can afford to lose? Ignore Strategy #1 and buy just prior to earnings, but only if RT is rising and price action is setting up properly. Check out the charts for IMG and VRX. Notice RT was rising like a stealth missile and the price patterns were bullish rounded bottoms. By contrast, Linamar’s RT peaked three days before earnings and price gapped down the day before earnings. Serious warning signs, almost as though people in the know were expecting bad news.
- Learn to trade options. If you don’t want to sell but you have any concerns about your stock’s coming earnings report, you can protect yourself by buying a Put or a Collar before earnings as insurance. Straddles and strangles are options strategies that allow an investor to profit on substantial moves either up or down in a stock’s price.