There are several factors that could impact a company’s stock price. Some examples could include a company posting a trading update, a company warning on profits, a company report an increase in growth, the Gross Domestic Product and employment levels of a region and even ‘acts of god’ such as natural disasters can all have an effect on a stock price. However in this section we will concentrade on corporate updates and trading statements.
UK companies normally post two trading updates with the interim accounts covering the first 6 months of trading and final accounts covering the full 12 month period. About half of the largest 350 stocks in the United Kingdom have a 31 December year so the main reporting season tends to be February and March.
A number of spread betting companies provide a corporate calendar on their site so that clients are aware in advance which companies are due to report. The trading update reports are released as an RNS and normally come out between 7.00am and 7.50am before the market opens. So the announcements are out just less than an hour before the markets open which doesn’t really give traders much time to analyse the figures and decide how the market is likely to react to those numbers.
“Many traders argue that it is not wise to hold open positions over earnings as it is a time when stocks are prone to gap up or down depending on how the market reacts to the results just released. This is good advice and I’d definitely recommend not opening new positions in a stock which is due to release results in the coming days. Likewise if you already have positions open in which you are nursing losses but holding out hope that the upcoming Q1 results might rescue your trade this too is a very risky approach to take. I’d suggest closing out your position in advance of the upcoming results otherwise you could end up with a small loss becoming a much larger one. If on the other hand you already have long positions open which are in profit then these are the types of trade I would consider moving up my stop up on rather than close outright in advance of the results. With these positions there is still the risk of results disappointing the market a the stock gapping down below your stop but you are also giving yourself the chance to take part in any earnings surprise to the upside.” – Advice from an experienced trader commenting on holding positions over earnings
Some spreadbetters like to spreadbet on a share going up or down shortly before a company is about to report its quarterly performance trying to second-guess how the numbers will actually mean for a company’s prospects and its share price. This is because spread traders want movement in prices and the earnings reports can create substantial fluctuations in stock prices, making the period immediately following their announcement the subject of much speculation for traders.
In general, any event or indicator of results that will impact the cash flow of the enterprise over the following three months is likely to mirror a reaction in terms of the stock price.
Opening a position on trading updates can be highly rewarding but it can also be risky since stocks can rise or fall by over 10% in a single trading session. The risk is even greater if you placing a spread bet on earnings reports; particularly since spread betting is a leveraged traded product where you only need to deposit a small amount to control a much bigger trading position. In a similar way that a bid approach can trigger a major movement, a profit warning can lead to a collapse in the share price. This can provide a good opportunity for spread traders to take advantage by opening a short position so as to profit from the expected decline in the share price.
The obvious events to be aware of are the company’s regular filings of earnings and announcements of dividends. One way of researching and getting clues as to the performance of a company is to study the performance of other stocks in a similar industry. Close competitors may have already released their earnings updates for the quarter which could provide further insights into potential stock movements. Here it is also important to appreciate that earnings reports from big companies can also have an effect on the general performance of a sector or index. For instance, when in December 2011 both Microsoft and IBM posted better than expected results, this had a positive impact on the Dow Jones index.
“I think it’s irrelevant what they say in the news, your trade plan should be formulated before we get the news, so many times I see the market react in the opposite way, trying to analyse what they actually say in the news is very difficult.”
It is important to appreciate that only when news alters market perception will a stock price move dramatically and when this news is priced in the market will again look forward. So even if a company reports heavy losses, as long as this news has already been digested in the stock price, then this might not lead to further pressure on the share price of the enterprise – in fact the share price might even recover a little – as long as the forecasted or expected decline is a bit less than what the analysts were predicting. Likewise a company that reports a good trading statement might see its stock price decline on results day – particularly if its trading is lower than what analysts were expecting. i.e. in such a scenario it could be the market was actually expecting even better results than the ones that were released so is disappointed. In other times the market can over-react particularly in the first half hour following such an annoucement, so in some cases it may be profitable to take a position against the initial market reaction.
Avoid buying a stock just because of a report in a tipping magazine or newspaper which stated that the results were good. As soon as the news is published this is now in the public domain and already priced in the stock price. This means that you have to take into account future expectations and events, not just the present.
Before I finish up this post I wanted to touch on a question I received from a regular reader of the blog a few weeks back. Declan asked if I could cover something on where to find out what results are coming out per industry. I’m not too sure on the ‘per industry’ part as from what I can see from my research on this the companies reporting each day over the 3 week earnings season seem to mixed across all industries. For example up next week we have Alcoa (Materials), Intel and Google (Tech), JP Morgan and Bank of America (Financial), YUM (Consumer) and GE (Conglomerate) all reporting.
So what’s probably more important for traders is for them to be easily able to find out when a stock they currently have an open position in (or one they are thinking of opening a new position in) is due to report. For this type of info I have found a site for USA shares called Earnings Whispers (http://www.earningswhispers.com) to be one of the best out there. Its simple to use, just bang in your ticker into the ‘Get Whisper’ box on the homepage and click ‘Get’. They return a lot of very useful information such as the results release date, consensus estimate and the earnings whisper for EPS. Another useful tool on the site is the Earnings Calendar, which will show you day by day which companies are due to release earnings results. So over the next 3 weeks or so it could well be worth your while taking 2 minutes each morning to click on the earnings calender for that day to see whose due to release. Right that brings this post to an end.
Note: One word about trading the news. I don’t analyze news that much very often my trades are contrary to what direction the news would seemingly be pointing us in, but sometimes we get times where news and technicals marry to force a perfect storm scenario this is where we jump in and have a right good go at making a decent harvest over a very short timeframe, the trick is to be unbelievably patient and then have the guts to go fat when these situations arise, my belief is most of the time the market is going nowhere at those times I’m not interested in being involved but when moves are upon us I’m interested in being very involved!