Yahoo Finance 3 Ways to Gain an Edge this Earnings Season
Earnings season can be a difficult period for investors. Four times a year (January, April, July & October), most publicly traded companies report their quarterly financial results. These reports often have a significant impact on the stock from a short- and long-term perspective. During this time investors need to balance risk management, while avoiding making hasty, emotionally-based decisions. Below are 3 tips on how to gain an edge this earnings season:
Pay Attention to the Zacks Expected Surprise Prediction Score (ESP): One of the primary purposes of Zacks Research is to make investing easier for investors of all kinds. Want to know if your company has a better chance of beating or missing earnings? The Expected Surprise Prediction (ESP) score does just that by identifying companies that have seen recent positive EPS revisions. The idea is that more recent information is, generally speaking, more accurate and can be a better predictor of the future, which can give investors an edge in earnings season. Pictured below is Amazon’s (AMZN) ESP.
Image Source: Zacks Investment Research
Though the Zack’s ESP score sounds good in theory, does it actually work? According to our 10-year backtest, when you combine a Zacks Rank of #3 (Hold) or better with a positive ESP score, the underlying company beats earnings 70% of the time and sees annual returns of ~28% on average.
Counterbalance your portfolio: As someone with a sweet tooth, one of my favorite sayings is, “Everything in moderation.” I know that if I work out and eat right, every once and a while, I can indulge. Maintaining a “yin and yang” mindset can also be helpful in the stock market. When preparing for earnings season, be sure your portfolio has a mix when it comes to market cap, industry group, and beta. You want to make sure you balance small cap, volatile stocks, and large cap, steadier stocks. The best way to do this is to look at a stock’s beta. Beta measures a stock’s volatility or risk relative to the overall market. For example, Virgin Galactic (SPCE) has a beta of 2. Meaning, all else equal, the stock tends to have double the volatility of the general market. Generally, during earnings season, it is best to have names with low beta, like Alphabet (GOOGL) (pictured below), to withstand any post EPS volatility. If two or three stocks go against you, you want to be sure you can survive.
Image Source: Zacks Investment Research
Refer to a Zacks Price & EPS Surprise Chart: A baseball player’s batting average is an example of looking back at the past to gain valuable insight into the future. Though the future is unknown, and the player may strike out, a player’s past batting history helps to define the odds on the current at bat. Zack’s EPS surprise charts do the same. The chart delineates positive surprises with green arrows and earnings misses with red arrows. Tesla (TSLA), slated to report earnings tonight, is shown below.
Image Source: Zacks Investment Research
Takeaway
Zacks provides investors with several important proprietary tools to help gain an edge during earnings season. Though the tools are not a panacea, they help define the odds for investors and allow them to gain more clarity during the stressful time that is earnings season.
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Amazon.com, Inc. (AMZN) : Free Stock Analysis Report
Tesla, Inc. (TSLA) : Free Stock Analysis Report
Alphabet Inc. (GOOGL) : Free Stock Analysis Report
Virgin Galactic Holdings, Inc. (SPCE) : Free Stock Analysis Report
