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From time to time, I mention that money is made if you are ahead of the market.
However, this is always an intriguing question, how can a investor get ahead of the
market? Today I am covering one of the ways to get ahead using the power of
earnings estimate.
Fundamental Analysis (FA) : This is probably the number one method
most investors use to get ahead of the market. Most people think that they just have
to study the
fundamentals, understand the financial statement (ie. balance sheet, cash flow
statement) well to project future
earning projections and to derive an intrinsic value of the company. There are many
tools to derive this so-called intrinsic value of the company share price for
what it should be worth, the most popular being the “discount cash flow”
method and the easiest one being “market comparable” i.e. P/E, etc. However,
this valuation is based on “publicly” available information and even a
slight
assumption variation can skew value the valuation in one
particular direction. It requires much more than
just analyzing the financial statements and industry trends and all these take
time. However, once done thoroughly, this is probably one of the
best way to be well ahead of the market.
Technical Analysis (TA) : This is probably the next popular method to get
ahead. There are basically two indicators to look out for - the “lagging indicators” and
the “leading
indicators”. I am not a firm believer in TA except when occasionally I use the
2nd one to help me determine “exit” and “entry” points for short-term trading
opportunities. I define short-term here as the zone between “entry and exit”
regardless of time and for me it’s different for stocks vs. options.
For option traders, time is very precious. What if you could make
use of FA and TA in a simpler way for short-term trading opportunity? What if you could easily derive
some meaningful insights from research analysts’ work?
Let me introduce
“Ahead of market” to you.
Though this book is designed to teach one how to implement several investment
strategies that enable you to use research produced by wall-street stock
research analysts, read this book to grasp a wonderful concept thoroughly called
the Earning
Estimates Revisions.
Here's a glimpse of this concept ...
The Wall Street research analysts cover one or more companies in their portfolio
and they are paid,
in most cases, via investment banking business awarded to their firm. Analysts, like other
communities, tend to herd and very seldom deviate from group’s opinion. Based on
their “assessment” of the company and its periodic business, analysts may revise
earning estimates from time to time. But they won’t deviate too much from the
group’s opinion. Slowly other analysts who are following the same company may
revise their estimates too. In general there are several types of estimates,
90-days, 60-days, 30-days, 7-days and current estimates. If you see a rising trend,
it means that business is probably doing well and the company is expected to beat earnings.
If it is a declining trend, the company is most likely to miss the estimates. That’s it!
You may want to read the book to understand the concept thoroughly. I believe
you may also find other more useful
insights as here we are focusing on only one concept.
But how do you use this concept to make money?
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Well, we could use this concept to develop an opinion about a company just before
it is going to announce earning results!!
Here's the big picture ...
Beat Earnings + Beat revenues + Lift Outlook for Both = Potential
Gap-Up and Price Break-Out
*
If this Quarter as well as this FY earning estimates are rising, there is
high probability it will beat earning estimates.
*
If this Quarter and this FY revenue
estimates are rising, there is high probability it will
beat revenue estimates.
*
If trend is rising for next Q and for next fiscal estimates, there is
high probability that it will lift estimates for next quarter and
next year.
Checkout estimate for Apple below (as of April 3, 2007) ...
Check out the chart and see the impact on the share price, isn’t
someone ahead of the market already?
If we can estimates these revisions thoroughly beforehand, we know in
advance what many would call an “Earning Surprise”. If we have a stock that
does this most of the time, it's possible that we have a winner in our portfolio.
Please note that this is NOT the only factor that drives
stocks crazy after earnings announcement For instance, past history of continuously beating and lifting
estimates builds “expectancy” and company needs to beat this
“expectancy” to drive stock crazy. Other factors include margins,
free cash flow, etc.
However, this concept makes 80/20 basis for stock price movement after
earnings announcement, and for exceptional gains in short-time, at times.
Article Source : http://www.optionpundit.net
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is also available for free to OP readers. OP is
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please note that trade decisions are solely yours and OptionPundit is
not responsible for any profit or losses caused due to information on
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