Earnings season is starting, so I thought that this post may be of value to investors and traders. We are in a mature bull market that may still continue, but 2014 is off to a strange start. The major averages are nowhere yet many speculative stocks are running and giving traders some great opportunities to profit. At the same time many leading stocks such as NFLX are off to a bad start.
Unless you know for sure that there will be a strong beat with great upside guidance, why take the chance of buying ahead of an earnings report? In most cases, especially at this late stage of the bull market, there is just no edge. As the late Marty Zweig used to say, why be a hero?
In my experience, playing defense and risk control win the game. If I miss out on the first part of a move, there will be plenty of time to enter the trade. But if I get in before the earnings are announced and I am wrong, I am dead. I will have lost valuable capital that I will then have to work hard at making back while being in a depressed state of mind for being so stupid.
Don't get me wrong. I'm not some tight assed Ben Graham value player. I trade where the momentum is. I am looking for big returns on my capital. At my old Argo Explorer Hedge fund I made 36% compounded annual returns for my partners over an 8 year period with no losing years. My largest draw down was around 5.5%. That meant that I had a great Sharpe Ratio and was viewed very favorably by the investment community. At Ironhorse Securities, my former Broker Dealer, I returned 113% compounded annually for 3 years in my proprietary trading account. And before my professional money management days, I made the same type of several hundred percent compounded annual returns that the likes of Timothy Sykes @timothysykes and Nathan Michaud @InvestorsLive brag about every day on twitter. The point being that playing defense is a big part of making large returns no matter what your disciple is.
I promise you that you may kick yourself for missing the home run, but you may kill yourself after getting your head handed to you. Here are two examples:
BBBY is one of the great long term growth stock champions of the past two decades. It is now a mature company that does not have it's earlier pizzaz but it is still growing. It had recently broken out to new highs and was about to report earning. Look what happened to the stock after earnings and guidance were reported. Disaster avoided!
Micron Technology was a superstar in 2013. On the one hand they had purchased Elpida and literally had cornered the supply of DRMA chip making capacity. Famous investors like Steven Einhorn and the "Fast Money" crowd on CNBC led by Regis Philbin (lol) were bulling the stock. Others were countering by saying that new capacity from competition was coming on line. I do not believe that the new capacity will be an issue for at least a year or two. But the issue was strong enough to have made MU correct prior to the earnings release. In any event as reported on this blog, I waited for the earnings to come out and for guidance to be reported before buying the stock. I missed part of the move, but was able to purchase the stock after hours in enough time to make a good profit which I sold into the gap up open the next day. Low risk profit made on great earnings and guidance. In the stronger market earlier last year, I was able to buy many stocks after the earnings and guidance were reported and still get in early on big moves.
In short, wait to hear earnings and guidance and if things are not clear, listen to the conference call. There will be plenty of time to make money. and see how the stock reacts to the earnings report. Just look at TSLA last year. I bought it two weeks after its great earnings surprise of May 2013. It had made a huge move, had pulled back, and I had learned the story. I was very late in understanding the implications of TSLA's breakthrough earnings. Yet I was still able to ride several swings up and more than doubled my investment in TSLA as it became one of the anointed ones. And if one misses one stock, there are thousands of others.
Val Kilmer as Doc Holliday said it best after shooting Johnny Ringo "Poor soul. You were just too high-strung." http://www.youtube.com/watch?v=FSjvgSHK0f0 Don't be high strung before earnings or you might end up like Johnny Ringo.
BIG Capital Advisors and Seaview Partners are not responsible for your investment decisions. We believe very strongly in our opinions, but you must perform your own due diligence in making your investment decisions.