Earnings Season: Here's How to Play It


By Chad Shoop, Banyan Hill Publishing, Friday, July 31

Investors love earnings season.

With good reason — you can make big profits at this time of year.

This is one of the most unprecedented earnings seasons in quite some time. The pandemic has created uncertainty unlike anything we have ever seen.

Tesla Inc.’s results last week are a great example.

Going into its report, we had no clue what to expect. We knew the economy was weaker and fewer people had purchased a vehicle. Tesla makes high-end vehicles that surely took a hit to sales.

But when the company reported its fourth-straight quarter of profits, it blew those analyst expectations out of the water.

The company somehow wasn’t fazed by the economic shutdowns, and instead, is thriving.

This news sent shares soaring more than 5% Thursday morning.

But the stock gave up those gains during the day. And then fell another 5% the next day, resulting in a 10% swing over just 24 hours.

Even though this is coming during an unprecedented time, swings like this are common throughout earnings season.

A month ago, I warned you this was going to be a historic quarter. But I get to treat every quarter the exact same, unprecedented or not.

Here’s the thing, no matter what’s happening in the markets, we can profit from human behavior. We can expect Wall Street to make mistakes. And we can make money from its blunders. In quarters like this, we could even make outsized gains.

Let me explain…

Wall Street Analysts Are Still People

Coming out of an economic lockdown, a pandemic and a massive government stimulus, it’s anyone’s guess to what earnings and revenues from the past three months will look like.

The only thing we know to expect is more volatility. That’s more swings like we are seeing in Tesla’s stock.

Up 5% one day, down 10% in the next.

These swings are impossible to predict.

It’s the volatility around earnings season that gets many investors excited. They to try to profit from the initial swings.

I take the opposite approach.

The big prices move when a company announces earnings are not the best way to profit, but it sets up the trades we take advantage of every quarter.

Those sharp 5% swings up and down on the event are the start of the mispricing opportunities that I look for.

If a company like Tesla beats earnings expectations, and the stock climbs, it’s still a mispricing opportunity because of the behavior from Wall Street analysts — they are slow to react.

An earnings announcement creates a whirlwind of new information for a company.

New expectations, revenue outlooks, earnings numbers to crunch, conference calls, upgrades, downgrades, the list goes on and on.

An analyst on Wall Street has to take it all and digest it.

But, they have a natural tendency to downplay the results impact for future quarters. As we’ve told you before, Wall Street is beholden to the companies it covers. So most of the information that regular investors are getting from them is at least a little bit skewed.

In other words, this situation creates a mispricing opportunity in the stock to take advantage of.

Mispricings Lead to Opportunities

Tesla is the latest company we’ve seen get this mispricing treatment.

Their quarter was fantastic and Wall Street has been slow to acknowledge it.

That’s why I expect shares to climb anywhere from 10% to 20% in the coming weeks as this slowly gets factored into the price.

The price movement we saw around their earnings announcement, coupled with the phenomenal results, put this opportunity at the top of my list.

It’s a nice short-term move for the stock.

On past recommendations on Tesla, we’ve seen gains anywhere from 35% in a few days, to more than 400% in just four trading days.

But we are not simply trading the stock.

While a 10% to 20% gain in a stock is great, we use options to get the biggest bang for our buck on these short-term moves.

As more companies report earnings in the coming weeks, we’ll have several new opportunities to profit.

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