Keys to trading earnings: Piper Jaffray

Too much selling can reverse course with one positive earnings report.

By Jamie Dlugosch Jul 21, 2011 6:59PM

Occasionally the market gets it wrong. When a company reports results that are contrarian to conventional wisdom of investors, big profits can follow.


The entire financial sector has been weak for most of 2011. Banks, Wall Street firms and regional brokerage firms have been pummeled by aggressive selling. On the surface the action was very much a broad brush and may make bank stocks stupid cheap.


As such traders digging a bit deeper could exploit valuation discrepancies compared to reality. The key to success of any earnings trade is to identify a company that is likely to surprise those betting against a certain outcome.


If actual results surprise, shorts will cover and previous sellers are likely to return as buyers sending share prices higher. The key is to accurately predict results based on prior performance with a good idea of what will drive a particular company’s shares higher.


Case in point is Piper Jaffray Companies (PJC)


The Situation


Piper Jaffray is a regional investment bank that specializes in corporate and municipal finance. It also has recently invested in the money management business, an area that it views to be more stable with plenty of growth opportunities. It is not a retail brokerage firm. To lump the stock in a similar vein is a mistake.



The company makes its money on initial public offerings and advising on merger and take-over activity. Both of those areas are seeing plenty of activity in 2011. As such the likelihood of Piper Jaffray doing well in the second quarter was pretty good.


In addition, last week JP Morgan (JPM) released earnings that beat expectations. Although not a true comparison to Piper Jaffray, the positive news bode well for Piper’s report in my opinion.


The Entry


Prior to releasing results, Piper Jaffray shares were down more than 22% for 2011. Helping to solidify that bearish tone was a first quarter earnings report that missed estimates by 14 cents per share. Given the volatility of results for a business like Piper, I preferred to focus on the 49 cents per share earnings beat the company produced in the fourth quarter of 2010.


Unlike other stocks in the market there was no late June/early July rally in shares. Instead Piper’s chart showed selling and more selling. In my analysis the selling had gone too far.


I advised subscribers of my new earnings season trading service (you can send an e-mail to for information) to buy shares of Piper Jaffray. The entry price on Tuesday was $26.75 per share.


The Exit and Outcome


Shares of Piper moved slightly higher prior to closing on Tuesday at $27.14. It is always a good sign when a stock rallies in the last hour of trading before an earnings report is about to be released. The next morning the company reported results that beat analyst estimates by 6 cents per share.


The stock immediately opened higher. On a day that the market was flat the move higher was pleasantly surprising. The concern of course is that weakness in the overall market might negate early enthusiasm for Piper shares. Considering Apple had produced a huge report the night prior, stocks should have been doing much better.


As such it was an easy call to hold Piper to see how things would shake out during the trading day. Up and up the stock went as the morning pressed on. In the middle of the morning shares of Piper spiked higher. The stock was now up more than 15% from the prior close.


At that time I issued a trading alert to sell the stock. Subscribers exited the position at $31.30. The total gain on the trade was 17%.


The Takeaway


Piper Jaffray earnings have been fairly volatile over the last year, but the market was treating the stock as if a positive report was completely out of the question. Lumped together with other stocks in the sector Piper could not escape the overall bearishness in the group. The lower prices opened the door to big gains assuming a positive report.


A positive report did indeed transpire and the rest is history. Shares of Piper closed at $30.75, slightly lower than the day’s high. The stock continued to move higher on Thursday closing at $32 per share. It certainly would have been reasonable to keep the trade open, but why get greedy.


There is still plenty of uncertainty in the market and locking in solid gains is never a bad idea. The idea behind trading earnings season is to get in and get out. Mission accomplished with this successful trade of Piper Jaffray.


If you are interested in joining us for the remaining 6 weeks of trading, feel free to drop me an e-mail at


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