As a trader we are interested in quick moves and when it comes to quick moves market tends to reward certain things.
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Earnings surprise: In the short run as well as in the long run a significant earnings surprise will lead to a rally, if the surprise is not priced in to current price. If you see the list of stocks up big in last one quarter you will see most of them had big earnings surprises.
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New contracts or orders: In industries where contracting is prime mechanism for selecting suppliers, a news of new contract or series of big contracts is a price mover. In such cases the contract tells you about future profitability. When looking at contract news one must look at size of the contract relative to companies current sales and how quickly the contract will get reflected in earnings. For example when a company with 50 million sales in last quarter wins a new 120 million contract for next quarter that s significant catalyst.
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Rapid Earnings Growth – Earnings growth is one of the most important driver of short term price action as well as long term price action. While sustaining earnings growth in the long run is difficult, in the short run a company with favorable earnings trend has higher probability of going up. The earnings outliers, companies that can grow earnings very rapidly, are obviously rewarded by investors. A rapid sales or revenue growth must also produce profit growth. That combination is ideal. Explosive growth produces , explosive price moves.
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Rapid Revenue Growth: Companies growing rapidly have products or services which are in demand by customers. As long as this kind of growth continues the company is rewarded by market. Companies which grow revenue year over year plus over last quarter are the one to look for. Market many times rewards high revenue growth , even if the company is not profitable.
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Rapid earnings or revenue potential in future: Because market acts as a discounting mechanism a company with future earnings or revenue potential is also rewarded. This is very common in biotechnology and technology sector. In these sector the companies trade based on future growth potential. In most cases , when the actual growth materializes, the stock may have topped.
For best results we must identify such companies in their early stages of such rapid earnings or revenue acceleration. The earnings season brings new growth to the attention of the market. A significant earnings acceleration , which is not on the radar of most investor results in out sized reaction. There is a structural edge in such breakouts.
Once the price trend gets established in such stocks, it attracts the momentum based traders. This drives the price trend further till at some stage the buying exhausts itself. A combination of earnings based and momentum based strategies is one of the ways to exploit this recurring market phenomenon.
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Earnings guidance
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Estimate Raise analyst conference
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Brokerage upgrades/downgrades
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New product/service launch
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New order
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New pricing power
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Death of competition
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Govt policy change
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SEC action
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IBD front page story
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Seeking Alpha mentions (which can be sometime pump and dump)
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Sector/industry
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Buyout/buyout rumor/mergers/ tie ups/division sale
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CEO/ CFO change
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Drug Approval
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Drug /marketing Tie Up
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Natural disaster/ war/ disease
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Political instability
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Shortages
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Declares Dividend
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Financial Engineering
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Junk of the bottom rally
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Insider buying
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Low float
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IPO
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High short interest
The things for which we are searching:
1. Beats revenue or going to beat and higher than the street consensus.
3. Heavily shorted stock(more than 20 percent).
2. Eamings higher of going to be higher than the street consensus.
4. Sold off a lot lately.
5. Ready to make a new high.
6. Ready to break through a high for a significant period of time.
7. New product to sell that is unexpected.
8. Gaining market share.
9. Good news on drug testing of biotech stocks- Phase Ill and IlI, Phase Ill is most important.
10. Upgrade from a well known analyst or reputable firm.TierIfirms such as Goldman and Morgan Stanley and Citigroup are more important than
Tier ll and Tier Ill banks.
11. More than one upgrade in a stock.Pay special attention to the price targets given in the upgrade and where the stock is trading at the moment.
12. Above 20 dollars.The cheaper the stock the less it moves.
13. Going forward revenues higher than consensus (next quarter and the year).
14. Going forward earnings better than the street consensus (next quarter and for the year).
15. High volume before the open.
