Dear Reader,

Where has the year gone?! It’s hard to believe we’re already in third-quarter earnings season.

Some of the biggest names in the U.S. have already released their reports this week, including Coca-Cola (KO), AT&T (T), Boeing (BA), and Boeing (BA) – with hundreds more to follow.

And, as you know well by now: Earnings drive the markets.

In fact, I saw a recent article in CNBC that said this is “perhaps the most consequential week so far this earnings season.”

It goes on to emphasize the importance of understanding analyst expectations for the companies and stocks you like (such as revenue and earnings per share).

I agree… to an extent. The problem is, the guidance alone isn’t enough to give you a realistic idea of a stock’s potential profitability.

You need the data.

And that’s what I want to talk about today…

As we’ve discussed many times before, one of the most common misconceptions about earnings is…You can’t predict where a stock will move.

Now it’s true that you can’t know with certainty what will happen to a stock at any time…

But you can trade – and profit – on the expectation of where a stock will move, thanks to one thing: its earnings pattern. Simply put, you want to look at how a stock has performed over the past four earnings quarters.

There are lots of sites out there, like Earnings Whispers and TipRanks, where you can search all upcoming earnings dates, analyst expectations, and previous earnings for free. I prefer, though, my own scans, like this one below:

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As you can see… there are several stocks that have beating earnings expectations 100% of the time over the past four earnings quarters, like Palo Alto Networks, Inc. (PANW) and CAVA Group, Inc. (CAVA),

The objective is to find stocks like these with this repeating pattern and trade around earnings so that you can pinpoint your optimal trade exits and entries.

After you run your search, you’ll want to pay attention to a few things in particular:

  1. The number of earnings periods analyzed

  2. The estimated number of days until the next earnings report

  3. The actual number of times a stock has met or bested earnings expectations

  4. The actual number of times a stock has missed earnings expectations

Earnings and the Options Trader

As an options trader, you’ll want to analyze how a stock has done in past earnings reports when you’re trading around earnings.

Consider a put option if you see that a company has a history of missing its earnings expectation or has a history of forecasting low earnings numbers in future quarters.

Consider a call option if you see that a company has consistently beat its earnings expectations and has a history of forecasting high earnings numbers in future quarters.

Now there’s a particular trading strategy you’ll need to use in order to maximize your profits – which we’ll talk about next time.

For now, here’s your trading lesson summary:

Here’s Your Trading Lesson Summary: Trading Earnings

We’ve entered the second earnings season, and this means that you may need to adjust your trades depending on a company’s earnings announcement. You can track earnings at a variety of sites, like Earnings Whisper and TipRanks. Regardless of the site you use, you’ll want to focus on the following:

  • The number of earnings periods analyzed

  • The estimated number of days until the next earnings report

  • The actual number of times a stock has met or bested earnings expectations

  • The actual number of times a stock has missed earnings expectations

Talk soon,

Signature

Tom Gentile
America’s Pattern Trader