3 Tips to Survive Earnings Season

3 Tips to Survive Earnings Season

5 Rules for Success from Warren Buffett’s Wife

Stocks to Buy: Stock Market Video

In Case You Missed It

We would all like stock investing to be simple. We’d like to buy a stock at 10 and wait for it to go up to 20 and then sell it. That’s the method advocated by Will Rogers, the American humorist whose formula for stock market success was, “Don’t gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don’t go up, don’t buy it.”

Since readers of Cabot Wealth Advisory are uniformly perceptive and intelligent, you probably spotted the flaw in Will’s method almost immediately.

If anyone can figure out how to buy a stock yesterday, I’ll be more than happy to hear from you.

With earnings season in full swing, the world is full of people who wish they could buy a stock ahead of its quarterly report and enjoy the big jump in its price when investors approve of the results and push the stock higher.

[Note: With second-quarter earnings from almost a quarter of the S&P 500 companies now on the books, 64% have exceeded expectations on earnings and 65% topped revenue estimates.]

The ideal would be a nice big blue-chip like Intel (INTC), a tech giant with a monster $172 billion market cap, a float of nearly five billion shares and over 2,000 institutional owners. It’s big, it’s liquid and (despite a 2012 slump) it’s been in a price uptrend since early 2009.

If you’d bought INTC after it broke out of a flat, six-week base in May, you would have enjoyed a high-volume bump from 28 to 30 when Intel’s management released optimistic guidance for its upcoming Q2 earnings report. And after the stock continued to float higher ahead of earnings, you would have been delighted by the stock’s even higher-volume leap from below 32 to near 35 following the quarterly results. All in all, an ideal earnings experience, made even less risky by the positive guidance. Here’s what the chart looks like.

But investors are also terrified of what might happen if results are bad. And they’re right to be. When any company misses its all-important revenue and earnings numbers or fails to come up to analysts’ expectations on guidance for future quarters, the reaction can be severe. Here’s what happened when TripAdvisor (TRIP) reported its Q2 results after the market closed on Wednesday.

On the face of it, a 31% jump in revenue (to $323 million) and a 6% gain in earnings per share (to 55 cents) don’t look bad. But while that revenue result was just ahead of analysts’ estimates, those same analysts had forecast earnings of 61 cents per share. So, investors shaved over 11% off the stock’s price in after-hours trading. The stock, which closed on Wednesday at 107.4, traded down to 95 early Thursday. Here’s what that looks like.

It’s always good to remember the rules for earnings season.

  1. Don’t invest heavily in a stock just ahead of an earnings report. If you think the results will be good and want to get in on the opportunity, buy a half a position or use an option to gain the exposure. Don’t bet big on a coin flip.

  2. Know when your stocks are reporting. Even if you don’t check your holdings every day (or every fifteen minutes, as some investors do), earnings reports are a big deal, and deserve your attention. To find a reporting date, either check the Investor Relations information on the company’s website or go to Yahoo Finance and look at Company Events.

  3. Most importantly, know what you will do if results (and the reaction) are either good or bad. If your company reports before the market opens, checking what happens in the first hour of the trading day will usually tell the story. If results come out after the close, it may pay to watch the after-hours trading. In either case, you should have a worst-case sell number in your head, and if the stock drops below that, don’t hesitate. Just sell and move on.

As always, the most important thing in the market isn’t what you predict, but what you prepare for.


Next Week’s Trades Could Hand You 30% to 50% Gains

All of our indicators are pointing to a new profit run, to be set off by next week’s economic reports. Recent market highs are just the beginning.

This week’s trades all match the trading signals that led us to these huge gains:

181% gain in Qihoo 360
122% gain in Yelp
133% gain in Netflix
84% gain in Facebook
83% gain in Forest Labs

Don’t miss out on this huge run-up-grab this week’s top trades in Cabot Top Ten Trader.

Click here for all the details.

Here’s this week’s Fortune Cookie. Remember, you can always view all previous Fortune Cookies here and Contrary Opinion buttons here. 

Tim’s Comment: Some people are process-oriented; others care more about goals. Mrs. Buffett, apparently, was one of the former-and that’s fine. But this little list will never achieve notoriety. To do that it needs to be pithier, like Woody Allen’s “80% of success is showing up” or the Ten Commandments’ “Thou shalt not bear false witness against thy neighbor.” Quibbling aside, I do embrace her final item as it pertains to investing. Expert investors know that even when you follow a successful system, you’ll still have plenty of losers. The key to success is ensuring that the winners outweigh the losers.

Paul’s Comment: These rules sound so self-evident that it’s easy to underestimate them. But when I think about my many colossal screw-ups over the years (in both investing and my personal life), I can easily point to one of Susan Buffett’s rules that I’ve violated, usually #3. And, as Tim points out, the fifth rule has some real food for thought. It’s always powerful to have the obvious pointed out to us in a simple way over and over. For many of us, it’s the only way we learn anything.

In this week’s Stock Market Video, I talk about the usual topics for July, which is to say earnings season and the winners and losers that the market is creating. With market trends all positive, it’s a certified bull market, but it’s not an easy one to find winners in. You need to pick companies with strong charts and be aware of when earnings are due. Watch this week’s video to see examples of companies with strong charts and good stories.

In case you didn’t get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, there are links below to each issue.

Cabot Wealth Advisory 7/21/14 – Tips on Small-Cap Investing

Tom Garrity, Chief Analyst of Cabot Small Cap Confidential, is in the spotlight in this issue, giving advice on how to play in the volatile world of small-cap stocks. It takes discipline and patience, but Tom’s advice can help reduce the risk and let you taste the rewards.

Cabot Wealth Advisory 7/22/14 – A Strong Solar Stock 

In this issue, I ranted a little bit about people who condemn technical stock analysis for not doing what it was never intended to do! I see it as one of the three tools that make growth investing possible. I also featured some wise words from Warren Buffett’s wife and a challenge to all Cabot Wealth Advisory readers to send me your favorite sayings, the ones that really tickle, inspire or instruct you in either your investment life or just life in general. I’ll give a free subscription to Cabot Stock of the Month to the person whose maxim I judge the best (and I’ll publish it here, too). If you have a favorite, and you’d like to share it, just reply to this email by July 30.

Cabot Wealth Advisory 7/24/14 – Portfolio Development for Retirement 

In this issue, value expert Roy Ward-Chief Analyst of Benjamin Graham Value Investor-gives sensible, comprehensive advice on how to invest for retirement at each stage of your life. Roy also gives many examples of buyable value stocks.


Paul Goodwin

Chief Analyst of Cabot China & Emerging Markets Report

And Editor of Cabot Wealth Advisory

P.S. Just a Few Spots Remain!

In just about a month, we’ll be meeting in Salem, Massachusetts for the Second Annual Cabot Investors Conference. All of our Cabot analysts will be there, discussing their favorite stocks of the moment, the state of the overall market, and lots of investing tips and techniques. You won’t want to miss it, and we’ve only got a few spots left, so register today by clicking here. 


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