Trading on Earnings Surprises

Companies typically report their earnings after the end of every quarter. A positive “earnings surprise” means that the company has reported better numbers than the analysts expected. A stock that “beats” on earnings is usually rewarded.

Like I discussed in and earlier article, the earnings announcement is comprised of three parts: earnings per share, revenue and then the company’s guidance for future quarters. The earnings per share is usually released first and then the revenue. These are considered the bottom line and top line, respectively.

The guidance is where trading earnings surprises can get very difficult. If the stock posts better than expected earnings per share and revenue but offers poor guidance, it will come under significant pressure. You still may get a pop in the stock on the earnings report but could be short lived once the guidance is revealed. This all takes place in the After the Hours market trading, which we know is a circus.

If you take a long term view when selecting investments, the short term ups and downs become far less meaningful. The guidance is more important, but very difficult to trade on.

DISCLAIMER: THIS IS ARTICLE IS FOR INFORMATIONAL PURPOSES AND SHOULD NOT BE RELIED UPON AS INVESTMENT OR TRADING ADVICE. CONSULT A QUALIFIED TAX OR INVESTMENT PROFESSIONAL TO DETERMINE WHAT IS BEST FOR YOU AND YOUR SITUATION.