I cordially invite you to witness a little-known market phenomenon play itself out over the next few weeks.
It’s called post-earnings announcement drift (PEAD).
Everyone knows that a stock will experience a price surge when it surprises on earnings.
For example, last week, eyes were on GameStop Corporation (GME) ahead of its earnings announcement.
[ad#Google Adsense 336×280-IA]You see, whispers are swirling that GameStop is destined to become the RadioShack (RSH) of the videogame industry.
That is, an irrelevant retailer with razor-thin margins and zero growth.
Instead, GameStop’s earnings announcement showed that comparable-store sales rose 5.8% in the first quarter.
(Comparable-store sales is the Holy Grail metric for retailers.)
As it turns out, the company is beginning to figure out how to unlock the lucrative mobile market.
As a whole, mobile revenue grew over 100% year over year to $102.2 million.
Analysts were expecting earnings of $0.57 per diluted share.
When the company reported $0.59 per diluted share, the stock jumped over 7%.
Had GameStop beat earnings expectations by a wider margin, the stock would’ve spiked even higher.
This is not an unusual event, whatsoever.
However, as a former trader myself, I can tell you that it’s extremely challenging to predict the outcome of earnings reports.
It’s like betting red or black on a roulette wheel.
Losses suffered as a result of negative earnings surprises typically get offset by the gains made on the predictable outcomes.
Armed with knowledge of the PEAD phenomenon, however, why even bother gambling on earnings reports?
What most investors don’t realize is that stocks continue to drift in the direction of the earnings surprise.
Of course, the biggest moves come within a week of the earnings announcement. But the price will ultimately drift for another 30, 60 and 90 days thereafter.
In GameStop’s case, the stock has traded down to its pre-surprise levels, which represents a perfect PEAD-inspired entry point.
At the very least, I urge you to concentrate your buying on only companies increasing earnings.
If you look at the 146-year history of the stock market, the one irrefutable fact is that share prices will always follow earnings.
Onward and Upward,
Robert Williams
[ad#sa-generic]
Source: Wall Street Daily