You can make money in this market trading stocks: NVDA

Use earnings reports to capture gains long or short

By Jamie Dlugosch Aug 19, 2011 4:29PM

What I like about trading stocks of companies about to report earnings is separating fact from speculation. At the moment we are in the midst of a massive speculative selling phase that has the market close to bear market territory.

 

When a company reports results, for a brief moment in time the shock of real news distracts market participants from the worry of the day. In an efficient market a stock is priced based on the discounting of future cash flows. Doing so requires using up to the minute available information to best accurately determine what those future cash flows will be.

 

That is why obtaining tangible information even if that information is looking backward, earnings reports allow the market to reset the price on a stock releasing profit numbers. On many occasions the inefficiency of a market has gotten that price so out of whack that the resetting of the price moves the stock in a big way.

 

Some are selling stocks into any rally. I’m making money for my subscribers buying stocks of companies reporting earnings. Last week at a time when the market was down significantly, I made 4 consecutive winning trades that made big profits for my subscribers. One of those trades was on graphic chip maker, NVIDIA (NVDA).

 

The Situation

 

Selling in the market was indiscriminate. There was no place to hide. One of the biggest losing sectors was the semiconductor space. Stocks in the group lost significantly more value than the overall market.

 

Prior to NVIDIA reporting earnings results shares were down more than 20%. The bear market trading of the stock was pure speculation that a double dip recession would wipe out profits at the company. Never mind that the company was growing profits meeting or beating quarterly estimates over the last 4 quarters.

 

 

At $12 per share NVDA traded for just 12 times current year estimates of earnings. Wall Street expected the company to grow profits by 15% from the current year to the following year. For the moment, Wall Street analysts were not showing any signs of negative impact from a possible double dip recession, but the stock market thought otherwise.

 

Given the likelihood of another beat of earnings estimates owning NVDA at a discounted price was an easy call to make despite the fog of fear that permeated the market.

 

The Entry

 

In a normal market environment, I usually fret little about the entry point of an earnings trade. I identify targets that are reporting results in the coming week. Usually a stock will narrow its trading range before big news is released. That allows me to get into a trade right before the event without having to worry about wide swings in the stock.

 

With the current market volatility it pays to place your trades if a stock dips in value before earnings are reported. In the case of NVDA, shares opened the week at $12.32 per share. The stock dipped on Monday, recovered on Tuesday, drifted lower on Wednesday and rallied on Thursday before earnings were released. I had my subscribers enter the trade on Wednesday at $12.51 per share.

 

The Exit and Outcome

 

NVIDIA reported results that met expectations after the market closed on Thursday. In afterhours trading the stock zoomed 20% higher. I had my subscribers lock in profits by closing half their positions at that time.

 

On Friday during regular trading, NVDA opened higher, but lower than the peak of afterhours trading. Shares drifted lower throughout the day. I had my subscribers sell the remainder of their positions at a 10% gain. The net gain from the trade was 15%.

 

The Takeaway

 

We are in the midst of a crazy market environment. Much of the current action is based on speculation. Those trading earnings reports can find brief moments of respite from the worries of the day. With the focus on results big swings can and do occur.

 

We are using every tool at our disposal to stay one step ahead. Selling shares of this trade afterhours made the net result a huge win. It also demonstrated the importance of placing the trade and then exiting straight away. Today shares of NVDA are at $11.75, below where we opened our trade to begin with.

 

This earnings season, my subscribers are up a net 9.2% on all of our trades (all long trades) since second quarter earnings began the week of July 11. During the same time the S&P 500 is now down 16%. We have had 19 winning trades and 13 losing trades.

 

If you are interested in trading earnings and would like more information on my service – 8-10 weeks of trading recommendations beginning at the start of each earnings season, shoot me an email at jdlugosch@gmail.com.

 

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