3 Rules for Making Big Money This Earnings Season (Which Kicks Into Gear Tomorrow)

I love earning`s season.

We get one every quarter – four times a year.

For a “quant” guy (and total numbers geek) like me, it’s like someone added four extra holidays to the yearly calendar.

And we’re celebrating one of those “holidays” even as I write this.

Celebrating because earnings season is when we get updated numbers that my Quantum Edge system can pull in, analyze, and use to generate fresh Quantum Scores for more than 6,000 stocks – a process that spotlights the very best companies – and the very best stocks to buy.

But let’s face it… earnings season can be scary, too. Especially when we’re careening through an uncertain and potentially dangerous stretch like we are right now.

But earnings season – and this one in particular – is a chance to take control.

Each company report is what we often call a “binary” event. There’s a good chance investors will jeer or cheer the results – and the company’s stock will move accordingly.

You can be on the right side of that move – or the wrong one. Knowing that can make you fearful. And fear is one of those emotions that makes us more prone to mistakes.

Here’s how you can use any earnings season – and especially this one – to make smart choices, to put the odds on your side, and set yourself up for big fat gains.

The Odds Are In Our Favor This Earnings Season

Let me start with this particular earnings season.

Because it’s actually a big opportunity.

When uncertainty and fear are running high, stock-price reactions can be more extreme than usual.

If you listen to all the predictions, results are going to stink.

And that’s great.

I’m not happy about lousy results, but I am happy about bottom-of-the-barrel expectations.

If you want a great source for quarterly forecasts, check out a research firm called FactSet. John Butters, the senior earnings analyst there, puts out a weekly report called “Earnings Insight.”

In the latest issue, Butters says first-quarter S&P 500 earnings are expected to decline 6.8% on a year-over-year basis. That would be the biggest drop since the second quarter of 2020 when everything shut down because of the pandemic.

Sounds kind of scary, doesn’t it?

But such low expectations actually tip the odds in our favor because those projections are already priced into stocks. When you’re starting at the bottom, the odds are strongest that you’ll see upside.

If we think about it logically, one of four scenarios is most likely when a company releases results:

*Meets expectations: And with expectations so low, a “meet” is typically good news, so shares probably trade higher.

*Misses expectations: Once again, expectations are already scraping the bottom, so a miss isn’t nearly as devastating as when expectations are high. Stocks will probably still drop, but not dramatically so… unless the report is absolutely horrendous.

*Meets expectations and lowers guidance: Guidance, or expectations for future quarters, will be most important this reporting season. Everyone wants to know how businesses are faring amid cost pressures, higher interest rates, and a slower economy. This is the worst-case scenario. Shares will almost certainly trade lower, but the punishment wouldn’t be as severe because of those low expectations.

*Beats expectations: Now we’re talking. Strong companies tend to beat expectations regularly, and that’s good for share prices.

*Meets expectations and raises guidance: This is this best scenario. Companies hit the earnings trifecta jackpot when they beat on sales and earnings and say business is so good that future results should be even better than previously thought. In a general environment of low expectations, shares can really soar.

So what do we see there? Three of four scenarios in which a company’s shares are more likely to move higher or take a small hit before resuming an uptrend.

It seems counterintuitive, but basement-level expectations lead to more of what investors refer to as “upside surprises” than you’d ever seen in boom times when stocks are priced for perfection.

Your Earnings Gameplan

A river of financial numbers will be flowing over the next few weeks, and my computers will be working overtime. Sales, profits, margins, and cash are all part of the “Fundamental Score” that helps determine a stock’s overall Quantum Score. And we see more Fundamental Score changes during earnings seasons than at any other time of the year.

I view tomorrow as the unofficial start of earnings season, as many of the big banks and financial firms release results – companies like JPMorgan Chase (JPM), Citigroup (C), Wells Fargo (WFC), BlackRock (BLK), and PNC Financial Services (PNC).

By the way, peeking inside the Quantum Edge system, I see that Citigroup and BlackRock have the highest Quantum Scores in that group at 51.7, while PNC is the lowest at 31. I wouldn’t buy any at this point.

Here’s how I recommend you play earnings season.

Rule 1: Go into earnings season already owning fundamentally superior stocks. I’ve found through my research that sales growth, earnings growth, profit margin, debt levels, and valuation are among the most predictive fundamental characteristics of future share prices.

If you own the best and strongest businesses, you’ve got very good odds of an upside surprise or a continuation of already robust growth.

Rule 2: Don’t buy right before a company reports earnings. Earnings are still binary events. So if you don’t already own a stock right before earnings, take a seat, grab your popcorn, and watch the show. And then…

Rule 3: Let the data be your guide. Did you expect anything different from a quant investor?

Once thereport is out, you have the information you need to make an informed decision. If the company’s fundamentals are strong, its price action is favorable, and Big Money is flowing in, chances are you have a winner.

I’ve found that the two best buying scenarios sound somewhat contradictory, but who cares if they can make you good money.

I like to buy after a company issues a sterling report and the stock shoots higher on big volume. Volume is the key. If a stock pops on average or below-average volume, it has a much lower chance of sustaining momentum. This is the Big Money component that is critical to a stock’s upside.

Conversely, if a stock with strength in all three of those components (fundamentals, technicals, and Big Money inflows) dips on earnings – and if the stock is in an established uptrend – it is probably a misguided reaction from investors and a buying opportunity to get in for higher prices down the road.

Talk soon,

Jason Bodner
Editor, Jason Bodner’s Power Trends

P.S. Earnings season is really a fun time of the year for a quant investor like me. It’s more data for us to find the best stocks in the market, ride their share prices higher, and build our wealth along the way.

That’s what I do personally, and it’s what we’re doing in my new Quantum Edge Trader service as we build our portfolio of strong stocks with strong momentum powered by Big Money buying.

Click here to learn how you can receive immediate access to our current stocks and be the first to know about those we add during earnings season.