The big day is finally here. It’s an event my fellow stock nerds and I get excited about four times each year.
It’s earnings season time once again! And some of the biggest banks, like JPMorgan Chase (JPM), Citigroup (C), and Wells Fargo (WF), crank things up beginning tomorrow.
Not excited?
That’s okay. I understand. I don’t expect earnings “watch parties” to be high on most people’s list of fun things to do, though my calendar is full of them.
But it can’t be ignored. Quarterly earnings give us the most information we ever get about a company’s business.
Those fundamentals – along with technicals and Big Money inflows – are the critical factors in my quantitative analysis system that accurately forecasts whether a stock will go up or down.
Results can be good or bad for a stock, depending on the company and – even more so – the expectations.
Let’s look at some important estimates going into the start of the Q2 earnings season.
- The estimated year-over-year earnings growth rate for the S&P 500 is 8.8%. If true, that will be the highest since Q1 2022.
- Communication Services, Health Care, Information Technology, and Energy sectors are predicted to report double-digit growth.
- The estimated year-over-year revenue growth is 4.6%.
- Peaking ahead, analysts forecast year-over-year earnings growth of 8.1% for Q3 and then a stellar 17.3% for Q4.
Those are positive numbers, and I do think they will help lift most stocks – especially here in July, which is historically a good month. The forward estimates combined with the increasing likelihood of rate cuts after this morning’s inflation news are downright exciting.
Still, there is something you should know when analyzing earnings reports…
Analysts’ estimates are almost always wrong.
That sounds bad, but in this case it’s actually good for the rest of us.
Why? Because they usually underestimate, and better-than-expected results are good for stocks.
Last quarter, 78% of S&P 600 companies beat analysts’ earnings-per-share estimates. And over the last five years, 77% of companies exceeded estimates on average each quarter.
Companies beating expectations – “upside surprises” – can shoot a stock higher. Conversely, missing those already low estimates can be painful.
You obviously want to be on the right side of that move.
Here’s how you can use earnings season to make smart choices, put the odds in your favor, and set yourself up for big gains.
3 Rules for Earnings Season
My computers will be working overtime over the next few weeks as a river of financial numbers are released. Sales, profits, margins, and cash are all part of the fundamentals that help determine a stock’s overall Quantum Score.
We see more Fundamental Score changes during the four earnings seasons than at any other time of the year. That’s a good thing, as it helps us identify stocks likely to move higher.
With all this in mind – especially the inaccuracy of analysts’ estimates – here’s how I recommend you play earnings season.
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 at least a continuation of growth.
2. Don’t buy right before earnings. Earnings are often binary events, and surprises can be negative as well as positive. If you don’t already own a stock right before earnings, take a seat, grab your popcorn, and watch the show…
2a. Most of the time. There are always exceptions, like the stock I just recommended to my TradeSmith Investment Report subscribers earlier today. It could report next week, but the trends and data are strong enough that we didn’t want to wait.
3. Let data be your guide. Did you expect anything different from a quant investor? Once the report 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, odds are high you have a winner. I can count on a roughly 70% probability based on back testing and use of my Quantum Edge System.
My 2 Favorite Buy Scenarios
I’ve found that the two best buying scenarios can sound somewhat contradictory, but who cares if you make good money?
1. I like to buy after a company issues a spectacular report and the stock shoots higher on big volume. Volume is the key. If a stock pops on average or below-average volume, it’s less likely to sustain that momentum. This is the Big Money component that is critical to a stock’s upside.
2. Conversely, if a stock with strength in all three of those areas (fundamentals, technicals, and Big Money inflows) dips on earnings – and if the stock is already in an established uptrend – it is probably a misguided reaction from investors looking for an excuse to take profits. That means it’s a buying opportunity for higher prices down the road.
These same two scenarios tend to be the most common with stocks I already own or recommend. They usually either pop on big volume with the likelihood of continuing higher, or they dip temporarily before turning higher.
For example, Camtek (CAMT) is one of our biggest gainers (up nearly 70%) and is the highest-rated stock in Quantum Edge Pro.
Source: MAPsignals.com and TradeSmith Finance
CAMT is expected to report Q2 earnings in about three weeks. Analysts expect the company will increase earnings 42% per share to $0.64 per share with sales growing 37% to $101.3 million.
Camtek consistently beats earnings, and I expect results will continue to reinforce the big upside potential of this under-the-radar leader in semiconductor measuring and inspection equipment, regardless of the immediate post-earnings reaction from investors.
That’s the importance of owning the best stocks with the strongest fundamentals and technicals and Big Money flowing in anytime, but especially before earnings are released. And if you don’t own them before earnings, the results help you get into the best ones for the next reporting season just three months later.
Click here to learn how you can join Quantum Edge Pro and not miss out on those superior stock recommendations before earnings season begins.
Talk soon,
Jason Bodner
Editor, Jason Bodner’s Power Trends
