Chase Platinum

This is a key part of the earnings-season dance that is often ignored by investors to their detriment. The company’s post-report conference call with analysts and other market insiders is what makes earnings such a nasty play.

For the most part a stock will move higher as its earnings release date approaches. During the “earnings run” about three-quarters of companies considered “good ones” will indeed move somewhat higher in the week preceding their actual earnings release. As the actual earnings date comes near, we have a significant problem: Do we hold through the earnings release hoping that the company will blow away the numbers and the stock will soar; or do we sell out in case the numbers are weak?

For years we have preached getting out ahead of the actual release. About 70% of the time a stock will sell off immediately afterward–even when the company meets or exceeds estimates. We have seen that many times during the current earnings campaign.

Why? First, you get some of the old "buy the rumor sell the news" theory that comes into play. Second, you never know what is going to be said by company officials during the conference call that follows the earnings release. That’s where the rubber meets the road.

We used to see examples of a stock that is expected to make 45 cents and actually posts 52 cents and they get a big stock drop. The reason: During the conference call management said something like, "Going forward we don't think we can sustain the growth level of the past quarter." That is all traders need to hear. With stocks priced at high multiples of future sales and earnings, they don't want to hear anything about future growth being unsustainable.

On the other hand, we have all seen a company actually miss the estimates but explain during their call that it was just temporary and that going forward they expect to increase sales and revenues. The next day the stock flies. We never really know what is going to be said and therefore holding a stock through earnings is a poor risk-to-reward scenario. More times than not the stock is going to drop and you are going to take a hit.

So our best earnings play is to buy into your favorite company about 5-7 trading days ahead of the actual earnings release and sell out either the day before or the morning of the actual release (if the release is scheduled after the close). You may miss some upside, but you will be spared a severe spanking if they either miss or worse, say something stupid during the conference call.

If you want to listen to the conference call yourself, go to the company’s web site. They will usually announce the date and time of the release of the report and where to go to hear the chatter.