Welcome ladies and gentlemen to The Stock Market Millionaire. My name is Robert Roy. This is episode number seven, Company Earnings: Friend or Foe? Yes, we’re here to decipher today, aur earnings announcements, a good thing or a bad thing for traders and/or investors?
So, first off, let’s talk about what “earnings” is. Earnings are also known as EPS, which is earnings per share. What does that mean? How much money did the company earn/make per share of stock? So in other words, per investor, share of stock, how much did the company earn per share? Now, that is not revenue. See, if you sold something and as an example, I’ve got a stapler here. If you sold this stapler for $10, that’s revenue, that’s sales. You can’t say that’s what you earned, right? It doesn’t work that way. How much did you pay for the stapler? How much did you pay to ship the stapler? Did you have staff? Were there taxes? Are there loan agreements that you had to pay that you financed? See, you could take that $10 stapler, and when it’s all said and done, you made a dollar. That would, and I’m talking net, net bottom line, you made a dollar that would be your earnings per share, right? How much did you actually earn per share of stock that you have out there in the open market or on the open market? That’s earnings per share.
And when a company announces earnings, you’re going to hear about some of the announcements, about when they’re coming out. You’d maybe watching CNBC or Bloomberg or listening to the radio, and they say, “Oh, Apple is set to announce earnings today.” Or, a news announcer comes out and says, “Microsoft, you’re not thinking they’re going to have a good earning season this year. ” That means their announcement is coming up.
Now, as I’m doing this podcast today, we’re just getting started in earning season right now. And, the way that you will know that is if you go and look up a company called Alcoa, AA is their ticker symbol. Alcoa is the unofficial start of earning season. Now, yes, there are other companies out there that announced before Alcoa does; it’s just that traders investors, brokers, firms look to Alcoa as, “Oh, that’s the company that we watch to know earning season’s about to get underway.” So somebody may announced sooner than them. We’re not worried about that. Alcoa is the one that I use and all the programs that we go through, where I check earnings, you know, like Power Option Plays, Alcoa is our starting point. If I look at Alcoa and see they’ve got earnings coming up in the next couple of weeks, I know I need to start checking all of my companies every single day for when their earnings are coming out.
Now, when a company does say that their earnings are coming out, and they are required to, by the way, every single company must announce earnings every quarter. They’ve got to tell the shareholders, the government does not allow them, the sec does not allow them to say, well, this quarter, we’re not going to let you know, because as an investor, I want to be able to make an informed decision on, do I want to buy that stock, keep that stock, is it what I need from my risk in my portfolio? I can’t do that, yf I don’t have the details of, I don’t have the information. So companies are required to announce it and required to announce every quarter. And just because they announced, let’s say on January 1st, this year, that doesn’t mean that they have to announce on January 1st, next year, or the next quarter has to be done on the first of the month. It doesn’t work that way. There’s a couple of days fluff on either side. Many companies will tend to go around the same date each time – in other words, X days from their last announcement – but it has to represent the quarter. And, it doesn’t necessarily mean it represents January, February, March is your first quarter. It doesn’t work that way. I have multiple businesses around the US that I own or on part of, and one of my companies does not have a December 31st year end, and that was done purposely, and there are reasons for that. We won’t get into the reasons here. Maybe we’ll do another podcast where we’ll go over entity structuring to give you for traders and investors, to give you an idea and understanding of that. But, the point here is, you don’t know, I don’t know when Microsoft or Apple or anybody else’s year-end is. You could find it out; I don’t really want to do that kind of research. I’m less concerned with the quarter, unless I’m trying to trade seasonals, which I’ll explain to you in a moment, but I’m less concerned with the quarter, more concerned with the date that they’re going to announce.
So let’s say that right now, I go and I look, and I see that the earnings announcement for Apple is on March 15th of this year. Great. But it’s not confirmed yet. What does that tell us? That tells me that Apple has said, “yeah, around the 15th, we’re going to announce what we don’t have a final date yet.” So you need to watch that because that announcement could move up or back. And, if you’re trying to make a trade and or investment on that position, and it was supposed to be March 15th and they move it up to March 6th, you know, or back to March 30th, that could wind up messing up whatever type of investment and or trade that you were looking to do on Apple…or any other position that you’re looking to trade. Apple is just the example.
So when they finally do make that adjustment and they say, “here’s our confirmed date,” understand it’s confirmed, but it doesn’t have to be. They can still change it. I have seen it happen. I have seen Apple just a few days before their announcement, move it one week further out, which crushed certain trades that traders are trying to do, just blew them away. The market makers like, “yes, thank you,” because nobody was winning on those trades any longer. So just because a date is given, that doesn’t mean that, they have to, they must hold to it. But normally when they confirm the date, they do hold to that date. Now there’s also going to be the time of day that you’ve got to look for. That’s going to be extremely important. You will have normally the major sites out there that announced earnings that tell you, this is when it’s happening. We’ll tell you it’s coming up in one of three places before the market opens, during the market or after the close. They don’t give you more detail than that. You can go to the individual company, Microsoft, Apple, Google, whoever, to their websites and look for the “investor relations” tab. And on the investor relations tab, it will tell you when the expected earnings are coming out…4:00 PM. And you know that because that there’s a conference call happening at that time. You can join the conference call if you choose whether you are an investor or not, there are some that will be locked up, but most of them are open to public because they know that they’re going to be analysts and news carriers, you know, news companies the Bloomberg’s and CNBCs of the world that are going to be on some of those calls to get the earnings and listen to what they have to say.
But, if a company comes out and announces earnings and they say, “Oh, Microsoft says we made $2 per share.” Is that good or bad? Think about it .is $2 per share. Good or bad for earnings? It’s not, it’s not,. Well then what is it, Rob? I mean, it’s gotta be something. Yes, but $2 compared to what? That’s the equivalent of somebody saying to me, “well, that car is expensive to buy that Chevy is very expensive.” “How expensive is the Chevy?” Oh, it’s you know, $25,000. “Well, compared to a Cadillac, it’s not expensive. Compared to a BMW or a Porsche, it’s not expensive.”
It’s compared to what? Well, $2 per share compared to what? Compared to what they said, they thought they were going to have an earnings. Microsoft expects before the earnings were coming out, expects to have $3 per share in earnings. Well, guess what? Microsoft stock is about to tank on that announcement. Normally. There are some circumstances that would prevent it, but sometimes it’s not the norm, it’s more the exception than the rule or Microsoft was expected to have $1 per share in earnings, and now they announced $2 well, their stock takes off. Right?
But keep something in mind. It’s not just about, it’s not just about the actual number. A lot of times it comes down to what’s called a forward-looking statement. “We missed earnings this quarter by 25 cents a share. And for that, the company knows to go in and get dinged. But we have redone our, our accounting system and we’ve written off the last of this write-off and next quarter, instead of $2 per share, we expect to earn four and a half dollars per share or $3 per share , whatever the numbers are.” That forward-looking statement is where many traders and particularly investors and/or hedge funds and things like that, mutual fund companies are looking for that forward looking statement. What have you done for me lately? That’s the biggest thing. What have you done for me lately? Right.
So what makes a good earnings announcement versus a bad earnings announcement? It’s not just the announcement. It is the actual numbers, or the other announcements that come around with that number. What’s coming up next? How does the market perceive it? Where there write-offs that are now gone, that they will never have to worry about again? Those make a big part of it.
So what is the best earnings trade? I get this from all the time. Rob, come on now, tell me what’s the best starting straight. Is it best to trade this a few weeks before the announcement comes out? So if it’s coming out on March 1st, maybe I’m sometime early February, I’m jumping into a longer term trade? Is it best to get in right before the earnings may be a couple of days, a day, the day before earnings, or maybe is it best to get in after the earnings announcement?
Hmm. So let’s talk about each of them. The way that someone would trade a very longer term view, meaning the longest one, a couple of weeks, possibly before the announcement, is with something that’s called a strangle. Now, we used to call it a “chicken trade.” Basically saying you are “chicken” that you don’t know which way it’s going. Soc you’re going to, with options, we’re going to buy a call, which means we think the stock is going up. We’re going to buy a put, which means we think the stock is going down. And if those costs me $4 combined as an example, if my position, whichever one moves up or down, if it moves more than $4, I’m profitable. If not, I’m underwater a little bit, right? My maximum risk is whatever I put in the trade, $4 in this example, and it worked phenomenally for years.
I taught this strategy to thousands of traders, how to use this strategy. But the problem was we taught it to too many traders, including the market makers who woke up one day and went, ” aha, I got it.” Don’t do that no more. And the market makers started jacking prices up a couple of weeks out before earnings, raising up volatilities and things like that, opening bid-ask spreads and taking advantage of unknowing investors and or traders. I had had my head handed to me on two or three trades that I was expecting to move, and although the stock moved enough, once it was all said and done, they sucked the volatility out, and then the options prices went back down to where they belonged, and now I was under water on the trade. It’s like, “great. What in the world just happened here?” So that strategy, although can still work, doesn’t work as well as it used to.
For some, they look to trade earnings right before the announcement, the day before, maybe two days before, they’re entering into that trade for that announcement, anticipating that they’re guessing which direction the earnings are going to be. They’ve done their research and they’ve looked at all the statistics, and they believe that just because Apple has had 31 quarters in a row of good earnings and positive moment that this one is going to do the same thing. And it might. But you are, you’re guessing. You’re not going at it as I know what I’m doing here. You’re guessing at what’s going on. All right. So caution there with that. For me, I love trading earnings after the announcement. That is my favorite way. Why? Because the market maker now takes those overvalued options, sucks premium out of them, brings them to an undervalue state. I am buying that option at that point. And then what happens? The market maker can’t leave it undervalued forever. They’ve dropped the value down on them for all the people that are closing their positions out. Well, I’m opening a position. I’m not what most traders are doing after earnings. Most traders are attempting before the earnings to pick direction – up or down. So, I go ahead in there and I buy that option. And even if the stock had a huge gap, it may be a gapped 10 or $12 up and then just go sideways. Well, the market maker leaves that options pricing for a little while, and lo and behold, they can’t leave it there forever because now people are recognizing that it’s undervalued. The option is selling at $3 and it should be selling at 4.50. So what does the market maker do? They start to move that price back up again.
So the stock may be going sideways, and the price on my options stolen increases. Now there are other ways I’ve taught in eMini Think Tank, which is one of our premier trainings that we do. Another instructor who works with us, Brandon Wendell, he now has that program, that that’s his, he teaches and trains on that, but I taught an earning strategy in there where we trade the NASDAQ, the NQ based on the company’s earnings, when they announced after the market closes.
See folks, there’s a hundred different ways from Sunday that you could trade earnings. There’s not one set way. The important thing to understand is this: the markets will move based on newsy events. This is what is called a plan news event. We know it’s coming out Tuesday before the market opens, Thursday after the market closes, and do a little bit of digging, and you’ll find the out the exact time of when that’s happening, and you can take advantage in the pre-market in the regular market hours or in post-market, and you still can trade them in any of those conditions when you understand the how.
Ladies and gentlemen, you have a great rest of your day, stay focused on the quest to becoming a great trader, keep crushing it. And remember, you’re just one trade away, take care, and I’ll see all of you at our next update. See you then!