Welcome to earnings season!
It’s hard to believe another quarter has passed and we’re now starting to see report cards for American companies flow in.
As an investor, you should love earnings season because this is when you get the best information on how your companies are performing.
But more importantly, you should really love earnings season because it usually determines how your companies’ stocks will perform in the weeks and months ahead.
Let me explain…
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First, let’s get back to basics.
Stock prices are determined by supply and demand. More buy orders for a particular stock pushes up the price, while more sell orders for a stock lowers the price.
Now, the reasons that investors buy and sell a particular stock can differ. But earnings are certainly a very important — if not the MOST important — reason for buying and selling.
This is exactly what makes earnings season so important.
When a company exceeds the earnings estimates made by Wall Street banks, prices can spike higher as investors rush in to buy shares. And when a company falls short of estimates made by Wall Street banks, prices usually drop quickly as investors lower their opinion of the company’s worth.
Now let’s get back to how you make money…
The Secret to Earnings Season: Follow the Money
People like you and me usually buy a few dozen to a few hundred shares of a particular stock at a time — depending on the price. That means we don’t quite have the power to move stock prices too much.
Wall Street however, they’re buying thousands to millions of shares of select stocks at a time. Hence, they certainly have the power to move prices higher.
That’s why when you invest during earnings season, one strategy you should keep in mind is to invest alongside these “fat cats” and ride their buying sprees higher.
After all, when I say Wall Street investment banks are buying thousands to millions of shares at a time, I’m not saying they’re buying them all at once.
I’m saying that these large positions are usually secured over weeks and months of steady buying. This should give you ample time to secure your much smaller position and profit as their demand naturally raises prices.
To accomplish this strategy, I recommend keeping an eye out for two specific types of companies as they report:
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Trend Confirmed Companies — These are the companies that are riding a strong trend higher already, and Wall Street is watching eagerly to see if the trend will continue.
Costco Wholesale Corp. (COST) with its e-commerce resistant business model, Under Armour (UA) with its loyal customer base, and Visa Inc. (V), who is currently profiting from the cashless revolution, fit this bill.
If these companies report strong earnings, look for their stock prices to move even higher in the weeks following as Wall Street adds to their positions.
Turnaround Companies — Remember, earnings reports don’t just include hard-to-read financial numbers. Company executives also give commentary regarding their company’s results and how they expect the company to perform in the future.
These comments can be critical in assessing when a struggling company may be able to turn around their performance.
Turnaround companies that I’m looking at today include Boeing (BA) after the 737 MAX crisis, and Snap Inc. (SNAP) as they look to turn a profit after a forgetful last two years.
For a full lineup of companies set to report earnings next week, tune into The Daily Edge on Monday and look for the 5 Must Knows section!
And until then, enjoy earnings season and the quick profits that can come with it!