Another Way To Make Money This Earnings Season
Just a few days ago I wrote about a great way to profit this earnings season. If you didn’t get a chance to read that article, you can check it out here “Two Ways You Can Profit From Earnings Season.” Unfortunately I ran out of room before I could present my second idea.
Let me give you a quick refresher…
Earnings season is just around the corner. Starting April 7th, every public company starts the process of announcing first quarter earnings. As always, this can be a volatile time in the market. Many investors and analysts alike are expecting earnings to be nasty.
This last quarter’s been filled with canceled orders, layoffs, cut estimates, and credit issues.
My first way to profit from earnings season was to look for essentially earnings surprises. In other words, look for companies where analysts have drastically cut estimates. When estimates have been cut aggressively, it sets the stage for companies to beat those estimates.
Even if the numbers they announce are horrible, by being slightly less-worse than expected, the stock can rally.
We’ve seen it happen with Sears (SHLD) and Tiffany (TIF)… it’s bound to happen to others.
Now here’s my second idea and yet another way you can make money this earnings season.
It’s the exact opposite of my first idea. Instead of searching out companies set to beat their estimates, we focus on those who are going to miss, and miss bad.
Now, this is very difficult to do. Trying to guess which companies will miss earnings and revenue guidance can be a full time job. A number of hedge funds have entire staffs of people who do nothing but look for these kinds of situations.
I have an easier way.
First off, we need to realize the stock market has staged a huge rally in the last few weeks. This indicates the market is looking for reasons to go up… and any bad news could easily push it lower.
Second, instead of looking at individual stocks, we should look at groups of stocks.
Even entire industries.
If we can find an industry that’s gotten ahead of itself (in other words run up more than the market)… and they start announcing horrible earnings results… the entire industry could be set to fall.
Do you really think the financial industry has recovered, on a fundamental level, enough to outperform the market? In the last month, the market is up 15%… the financial industry has jumped more than 25%.
Who are they kidding?
I believe as earnings season rolls around for these financial companies, one or two bad news announcements will slap the entire industry lower.
So how can we profit?
The first is to short some of the stocks in the industry. When you short a stock, you borrow shares from your broker and sell them into the market. They give you cash now… cash that you can later use to repurchase the stock when it falls.
It’s a good strategy; unfortunately, you need to be approved for margin in your account. And the risks of a position moving against you can be big.
Another way to profit is by purchasing puts.
Puts are simply securities that give you the right, but not the obligation, to sell 100 shares of a particular stock at a fixed price. Here your profit potential is big. Options are relatively inexpensive. Some can be purchased for a few hundred dollars, and if you get the move just right, gains of 300%, 500% or 1,000% aren’t uncommon.
Few investors realize this, but you can buy options on many of the ETFs, including the XLF. If you think like I do that the financial industry might continue posting bad news and poor earnings, then now might be a good time to buy puts on the XLF.
Category: Stocks
