William O’Neil India
“Concentrate on stocks with proven records of significant earnings growth in each of the last three years plus strong recent quarterly improvements. Don’t accept anything less.”
- William J O’Neil, MarketSmith Founder
If stocks report better-than-expected results, their prices could soar higher from current levels. However, they could drown lower into their bases if the reported numbers miss street expectations.
Top five things to look for during earnings season
Watch for sales and EPS growth of at least 20–25 percent. The company probably has a product or a service that is selling like hotcakes. You need to know what is happening here.
Rather than a fluke quarter, watch for average sales and EPS growth of 20–25 percent over the last three quarters. This trend confirms your theory that the company could be up to something the others are not able to achieve.
Watch for an acceleration in earnings growth rate. Our studies on big winning stocks have shown that big price moves follow such accelerations in earnings.
Look if the current quarter’s earnings are up in percentage terms from the same quarter a year before. Such a comparison could help remove any effect of seasonality.
Simply avoid taking new positions in stock if its results are due within a week. Booking your profits and staying away from the stock before its results are announced is not a bad idea. You can always get back in the stock.
How to play this earnings season?
Buying a stock during the earnings season, before results are announced, is very tricky. First, it is hard to know whether the company will beat, miss, or meet street expectations.
Second, it may be even more difficult to guess how shares will react to results. Simply avoid taking new positions in stock if its earnings report is due in a week or so.
Your strategy to invest in shares should not involve any guesswork. You need to be ready to hold your card if you think probability could work against you. In that case, you are giving volatility an upper hand.
You should simply avoid it if you have even the slightest whiff of risk. Shares tumble the most if companies miss their earnings estimates.
How much growth is good enough?
Have you ever read a corporation’s quarterly earnings report that down-rightly stated they were inefficient and the competition had a better product?
No! Here’s what you could probably see: “Our company reported record sales for the quarter. Sales were up 20 percent on a comparable basis.”
If you own their stock, this is a wonderful news. You certainly are not going to be disappointed. You will think this is a fine company (otherwise you would not own its stock!), and the report confirms your assumption.
This is known as confirmation bias. Information is viewed as confirming evidence of your existing beliefs without any second thoughts.
Does this record-breaking sales announcement make for a good report? You might need to look at a few other things.
What if its EPS was up only 5 percent? Its sales jumped 20 percent, sure, but why did the profits remain so low? Something might be wrong -- maybe the company’s margins are crumbling.
If you own the stock, you should be, at any rate, concerned and evaluate the situation closely to see why earnings increased only a trickle.
Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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