Make money trading earnings

You can beat this crazy market by focusing on trading companies set to report operating results.

By Jamie Dlugosch Sep 26, 2011 11:39AM

There is a tremendous amount of noise in the market that can influence stock price. Ultimately, the value of a stock is based on the present value of future profits.

 

When a company reports earnings results, market participants receive a key piece of information that can be used to determine the price of a stock. For a brief moment in time after a company releases its operating performance, the market will adjust pricing based on how the numbers match up against current expectations.

 

In many cases stocks of companies reporting results will move significantly higher or lower.

 

Understanding how investors use earnings against Wall Street estimates creates a profitable trading opportunity. Using a few key variables combined with understanding how the market will react to new information can guide you how to trade a stock in advance of the news being reported.

 

Use the Earnings Predictor to help you identify winning trades. On Thursday, Micron (MU) reports earnings for the quarter ending Aug. 31, 2011.

 

Current situation:

 

Micron has shown near disastrous results having missed estimates in 3 of the last 4 quarters:

 

Earnings History

Aug 10

Nov 10

Feb 11

May 11

EPS Est

0.38

0.28

0.02

0.16

EPS Actual

0.32

0.15

0.07

0.07

Difference

-0.06

-0.13

0.05

-0.09

Surprise %

-15.80%

-46.40%

250.00%

-56.20%

 

 

In the most recent quarter the company missed Wall Street estimates by 9 cents per share. The significant earnings miss suggests that demand for Micron’s primary product is slowing and prices are falling. The company sells memory chips that have essentially become a commodity product. There is nothing sexy about Micron. It will do well during an economic expansion and it will do poorly during periods of contraction.

The results at the company are foreshadowing a double dip recession. With most economist predicting anemic economic growth in the coming year, the hard times for Micron may only be just beginning. Wall Street estimates for the future have been slashed over the last 90 days.

 

For the quarter to be reported the average estimate is for the company to make 2 cents per share. 90 days ago the estimate was for a profit of 23 cents per share. For the August 31 quarter also marks the year end for Micron. The average Wall Street estimate for the year is 32 per share in profits. Next year the company is expected to make 56 cents per share. At current prices Micron trades for 20 times fiscal year profits.

 

Since the end of April, shares of Micron have lost 45%:

 

Analysis:

 

Be careful of the value trap in Micron. On the surface it would appear that the stock has fallen far enough to account for a significant slowing of business. There is more room to fall. When the market bottomed in March of 2009, Micron traded for a dollar and change. That is far below the current price of $6.50 per share today. Analyst estimates have been falling hard over the last 90 days. The variability in the forecast suggests much uncertainty about the future of Micron. Just as Wall Street is too conservative on the way, analysts tend to miss the mark on the way down too. Look for Micron to miss when it reports on Thursday.

 

Earnings Beat Probability: Micron has a 75% chance of missing estimates and lowering guidance when it releases results on Thursday.

 

The Earnings Predictor (long recommendations only) had 24 winning trades and only 14 losers during the last July/August earnings season. The total aggregate return for subscribers was 12%. That compares quite favorably to the 12% loss in the S&P 500 over the same period. October earnings season begins in two weeks. To become a subscriber, drop me an e-mail at jdlugosch@gmail.com.

 

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