1. Understanding Earnings Season [0]

thumbnail Earnings season occurs four times a year when public companies report their financial results, which can cause significant stock market volatility.

1.1. What is Earnings Season? [0]

  1. Earnings season is a period that happens four times a year when publicly traded companies release their financial results, showing how much money they made in the last quarter [0].
    1. These reports can cause significant price changes in stocks, either rising sharply or falling dramatically [3].
  2. Publicly traded companies are required to report their financial performance to investors [10].
    1. This information is crucial for Wall Street analysts to determine a stock's value and for investors to decide whether to buy or sell [11].
  3. Earnings seasons occur quarterly, each lasting about six weeks [12].
    1. Companies like Tesla, AMD, and Netflix present these reports every three months [13].
    2. Companies must also update investors on their business developments and upcoming events [15].
  4. Earnings dates are announced weeks in advance, with conference calls held Monday to Friday during regular trading weeks [16].
    1. Reports are typically released either before the market opens or right after it closes, which is common for major tech companies like Google and Apple [17].

1.2. The Day of the Earnings Report [20]

  1. Companies first release key financial metrics, summarizing their performance in the last quarter [20].
    1. They post their revenue figures and earnings per share (EPS) [21].
    2. After these metrics are announced, stock prices often fluctuate in after-hours trading or pre-market [21].
      1. For example, if figures exceed expectations, a stock might "rip up after hours," as seen with an Amazon chart where the stock "ran up 300 to 400 percent per share" [22].
      2. Conversely, disappointing results can cause a stock to "rip" downwards [25].
  2. Following the initial release, a more detailed conference call is held with the CEO, CFO, and COOs [28].
    1. They discuss business specifics like balance sheets, new products, consumer trends, and competition [29].
  3. Key metrics that investors and Wall Street use to analyze a stock are:
    1. Earnings Per Share (EPS): This is calculated by dividing the company's net profit by the number of outstanding common shares [31].
      1. For instance, if a company made $1,000 profit with 1,000 shares, the EPS would be $1 per share; a $1,000 loss would result in a negative $1 EPS [33].
    2. Revenue: This is the money a company earns from selling its products or services [37].
      1. While high revenue doesn't guarantee profitability, growing revenue is a key indicator of potential future profitability and growth, especially for tech and growth stocks [39].
      2. For example, AMD stock soared after reporting 92 cents EPS and 49% year-over-year revenue growth, and Google reported $30.69 EPS and 32.4% year-over-year revenue growth [44].
    3. Guidance: This refers to a company's projections for future earnings and revenue growth [50].
      1. The stock market is "forward-looking," so investors care more about future profit expectations than past performance [52].
      2. AMD and Google issued "upside guidance," forecasting more growth, which positively impacted their stocks [49].
      3. In contrast, PayPal and Facebook (Meta) projected slower growth, causing their stocks to drop [56].
  4. Understanding these metrics is sufficient for short-term trading, but long-term investors should read the full earnings transcript or listen to the calls [58].

2. Trading Strategies for Earnings Reports [61]

thumbnail Traders can profit from earnings season by observing market anticipation and trading the resulting gap-ups or gap-downs the day after the report.

2.1. Trading Tips for Earnings Season [61]

  1. Look for anticipation moves into earnings [61].
    1. Stocks with large followings or significant market weight, like Tesla, Apple, and AMD, often make big moves before earnings reports [62].
    2. If market sentiment is positive, a stock might rise in anticipation of good earnings [64].
    3. However, this isn't always true, especially in fearful market conditions like a pandemic or high inflation, where stocks might still sell off [65].
  2. Never hold short-term trading positions into earnings [67].
    1. This is considered a "true 50/50 gamble" because stocks can tank even after beating earnings expectations, or they can soar after missing them [68].
    2. The profits from such gambles are often small compared to potential large losses, making the risk not worthwhile unless holding a small position or hedging with options [72].

2.2. Preferred Trading Strategy: Post-Earnings Gap Trading [74]

  1. Trade the gap-ups or gap-downs the next day after the full earnings reports are released [74].
    1. This approach allows traders to analyze the after-hours market action and observe how similar industry stocks react [75].
    2. Waiting until the next day provides time to read conference call transcripts and fully understand the EPS, revenue, and guidance metrics [76].
    3. Traders can then "trade the pre-market moves the next day accordingly" [77].
  2. Earnings season creates exciting times with significant volatility, offering opportunities for traders to make profits [80].
    1. If one earnings season is missed, another will occur in three months [81].