How to Trade During Earnings Season
Earnings season is an unofficial timeframe during which many publicly-traded companies release their quarterly earnings reports at the end of each fiscal quarter and it lasts several weeks.
Most publicly traded companies follow the standard calendar, with the ends of their financial quarters coming at the end of March, June, September, and December. Approximately one week to ten days later, the companies release a report that details the status of their revenue, expenses, profit, and financial outlook. But how does this affect your trading and what should you consider during this period?
What to Consider During Earnings Season
Earnings season can act as a double-edged sword. While Earnings season can have the potential to shift the trend of an entire sector, sometimes it can have little effect on the company’s shares. For example, even if an entire sector dips during earnings season, that does not necessarily mean that the shares of a company you are following will dip. Nonetheless, there are a few aspects you can take into consideration when trading during earnings season.
Companies’ News and Recent Updates
Before deciding to trade on a particular share, traders may review recent news surrounding the company. Was there a recent press release during the quarter? Were there any upticks in positive reporting? Did the company have any scandals that may affect its reputation?
These can all give some ideas on what the upcoming report may say.
Historical data
Looking at a share's price movements from the previous year, half, and quarter may give insight into how traders will react to whatever the upcoming earnings report says. If a year before, a company’s earnings report showed growth but its price dipped anyway, you can attempt to find the reasoning behind this. If a company’s revenue decreased but its share prices rose, you can find out why traders felt optimistic.
Past performance is not always indicative of future performance. Yet, it is still something that you can take into consideration.
Expect the unexpected
While the aforementioned factors can be taken into consideration during earnings season, you should still expect the unexpected when it comes to the market.
Sometimes, share prices rise and fall without a clear underlying reason. One example of this was Zoom (ZM) in Q3 of 2020. During this quarter, Zoom reported revenue of $777.2 million, while only $693.4 million was expected. In addition, their earnings per share came in at $0.99 versus the predicted $0.75.
Yet, despite these seemingly optimistic numbers, the share price dropped 22.5% from $486.90 the day of the announcement to $377.20 two weeks later on December 14th.
While the exact reason for this is unclear, it may be that traders worried about Zoom hitting its peak with Coronavirus vaccines around the corner, and with more in-person interactions, there would potentially have been less demand for video conferencing.
A more recent example is American sports equipment manufacturer Under Armour (UAA), whose stock started falling after reporting good 4Q21 earnings on February 11, 2021. Although the company's earnings for the fiscal year which ended on December 31, 2021, were positive due to higher demand for athletic apparel and footwear, the hike in supply-chain costs put pressure on its profitability. Thus, despite the company’s positive earnings, Under Armour’s shares took a gloomy turn as they fell by almost 10%, hence reaching $18 per share. The future of the sports apparel maker is still unclear with factors like inflation and supply-chain issues still unknown.
Trading During Earnings Season
Choosing companies
The first step to developing a trading strategy during earnings season is narrowing down the number or range of potential companies to research. This search can begin by reviewing companies within a particular sector of interest, based on which companies have caught your attention while trading between Earnings Seasons.
Checking the news regularly before the beginning of earnings season will help traders keep up-to-date on global politics, acquisitions, and potential IPOs. If a trader begins reading headlines in January in preparation for April earnings, they will have better insight into various market factors that may potentially be difficult to digest with only a week to go before Earnings Season.
Research
Once you have chosen companies whose shares you wish to trade, focus on one at a time to dive deep into each business. Ask yourself, what are their key sources of revenue? Is their most popular revenue source also the most profitable?
For example, Disney (DIS) is well known for its parks and theatrical releases, yet in 2020 it was Disney+, their online TV and movie streaming service, that surpassed expectations with 73 million paying subscribers. While people may not think of streaming when thinking of Disney, it has proven to be a vital revenue stream due to higher subscriptions and views brought by the Covid-19 lockdowns. In 2021, Disney+ surpassed that subscription rate by reaching about 118 million subscribers. However, despite that ostensible increase in subscription, the company reported disappointing Q4 earnings for 2021 with people slowly going back to their normal lives in response to COVID restrictions getting lifted. Accordingly, this turnaround only highlights the fact that share prices can be volatile and unpredictable despite their earnings in the past.
Moreover, it is also important to review analyst expectations to predict the target price per share. Whether you agree or disagree with the forecast, it may impact the company positively if they exceed the expectations or negatively if they fall short, regardless of their actual earnings.
A trader may speculate that a company’s revenue stream presents an opportunity for the share price to rise, so they may open a CFD ‘Buy’ position, to benefit from a potential uptrend. On the other hand, they may speculate that this revenue stream is not sufficient and the buzz around the shares will soon fade. This may lead them to open a CFD ‘Sell’ position which will allow them to potentially benefit from a falling share price. Both of these positions have inherent risk, should a position move in a direction that is not favorable to the trader.
Stick to your strategy
Once you have done your research, pick a strategy and stick to it.
When entering a trade that clearly moves in your direction, it is easy to ride it until you see a clear indicator to sell, but this rarely happens. Following earnings releases, share prices have the potential to move higher and lower throughout the day. During these volatile periods, it may be difficult to take a step back and see the big picture.
Consider when you want to enter and when you want to exit. Which numbers are you looking for and what is your ceiling? Consider how much risk you are willing to take on and what the full strategy will be, all before entering a trade.
Regardless of how or what you trade, Earnings Season holds the potential for market volatility.
Trading CFDs with Plus500 allows you to trade on various scenarios by going long if you feel the price will rise or going short if you believe the price will fall. Our tools, such as News & Market Insights, indicators, and risk management features can help you make clearer choices both before opening trades and while they are active.
