Immediately, CNBC and others alike blamed the weak stock performance on inventories, yet the stock’s initial 7% loss was created when nothing was known except top and bottom line numbers. Turns out, shipments had increased 5.1% year-over-year, revenue rose 13.4%, and guidance for shipments was raised.
I bought the stock around $35, sold it for a near 40% gain, and was able to do this by identifying a strong quarter regardless of the stock’s initial reaction. During this upcoming earnings season, you will notice several Harley-Davidson, Inc. (NYSE:HOG)-like stocks.
These stocks typically do not trade higher the day of their report – it might take weeks or even months – but if the quarter is strong then buy and wait!
Rule #4 Roulette Is Ok “If”!
Do you like playing roulette, because when you buy prior to earnings you are playing roulette! During earnings season, a company can crush all expectations and trade lower, or trade higher after missing expectations. Therefore, it becomes a crapshoot, or a game of roulette at your local casino.
With that said, you don’t want to play roulette in the market and buy before earnings. Unless, you are buying stock in an industry that has provided consistent monthly updates. For example, the pharmacy and automotive space give monthly sales reports. A company such as this might be ok to purchase prior to earnings.
Personally, I have increased my position in Ford Motor Company (NYSE:F) prior to earnings. The stock is sitting at 52-week highs and has done so with strong sales performance. In June, sales rose 14% year-over-year, including strong gains with trucks, and a 44% rise in China.
The auto industry appears to be clicking on all cylinders, and with guidance that is continuously upgraded, the risk of post-earnings volatility is diminished, making it worth the risk.
Final Thoughts
Personally, I couldn’t count five stocks (aside from clinical biotechnology) that I didn’t purchase after earnings. I always use earnings as an opportunity to capitalize on the irrational behavior of the market.
My Motley Fool CAPs picks, and score, has been accumulated due to my selections post earnings, as all were added following quarterly reports. These same stocks are those that I have added in my personal portfolio. Hence, there is a great deal of upside that can be created, but only if you have a plan and keep your emotions in check during the season.
The four steps above, are those that I feel are among the most important in the goal of creating gains – rules that I have used for many years — and now they are yours to utilize.
Brian Nichols owns shares of Ford. The Motley Fool recommends Ford. The Motley Fool owns shares of Ford. Brian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article 4 Rules to Follow This Earnings Season originally appeared on Fool.com is written by Brian Nichols.
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