Earnings Surprise trading

Quote from keyser1:

buy google, it beats earnings every single time!
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funny you mention that..i just finished my initial analysis of Google.

It appears as though the earnings are a little harder to hit this time. My calculations show that goog needs to report somewhere around $2.104 billion in revenue, or a 33.24% increase over last qtr.

In the last 3 qtrs, GOOG has increased revenue 14.00%(Sept), 10.18%(Jun), and 21.80%(Mar).

This makes me a little skeptical come earnings report time. Goog will still grow, I think only around 20-25% max, which utimately is only about $1.50 - $1.63 EPS...not the expected $1.73

EDIT: However, I am currently long in google:)
 
Quote from HotTip:

I looked at the idea some time ago, and did a comprehensive data analysis over almost a thousand ERs. My conclusion was that it was possible to extract a profit if you monitored the price action prior to the ER, because more often than not a stock that significantly trends in the day(s) prior to the ER will reverse immediately after the ER, regardless of the news, as all the traders attempted to capture a profit. Unfortunately I abandoned the idea because there were too many 25%+ hits. The extremely high volatility meant that I'd have to scale down my bets considerably, yielding an overall profit that was less than desirable. What I trade now is much less volatile and also much more consistently profitable.

I agree with Truthteller though. Just by analyzing the fundamentals it is impossible to predict how a stock will do post-ER, as all of the fundamentals (even whisper numbers) are already captured in the stock price. I likewise attempted to predict post-ER price movement based on guidance, whisper numbers, ratings, etc., and found no success. Price action was the key.
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I understand what you are saying, about post-ER price predictions. However, I think that there can be some expectations based on previous post-ER reactions and ratios involved. Using the ratio of post-er price movement in comparison to the earnings surprise amount, you can come up with the degree of post-er price change based upon the surprise. So i guess what i'm getting at is when looking at past qtrs ER action, you can determine (roughly) what the best approach might be.
 
the way I trade them is that if the stock gaps up after an ER, I buy them and hold them for 3 weeks. very simple but effective.

how do you guys trade the price action ?
 
Quote from RunTrade:

Does anyone focus heavily on anticipating and trading on earnings announcements?

What would you think about analyzing fundamentals to determine the probability of beating the estimates, volitility of surprises, and using some options for leverage. Would this be a sound strategy? I have found that companies which are currently fundamentally unsustainable have EPS estimates that are somewhat on the aggressive side and that such companies can usually do a good job outperforming these estimates.

My only difficultly in this approach is determining the proper entry point. In theory, the price should slowing trend towards the earnings report of either "good news" or "bad news" (sometimes no news), but that is only a generalization and I dont have, or at least do not know of any model or formula that indicates the strengh of such a tendency on an individual stock basis. any help?
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RunTrade

As others have noted, trading through earnings announcements can be a risky business.
I trade positive earnings surprises at the open of the session following announcement. I've found is works best with higher price/higher volatility stocks. I go long on NYSE stocks and short on NASDAQ stocks. If there is raised guidance with the surprise I'll go long on NYSE and NASDAQ stocks. This approach has worked reasonably well over the last several years (+200 odd points).
Recent examples are GOOG short (21 points from Feb, Apr and Oct trades), HAR long (15 points from 1 trade in Aug).
Alas I have my fair share of stopped out trades, but it is worth persevering with.
 
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