Second quarter earnings season will begin in earnest in early July. There is a little-known secret called post-earnings drift that can help savvy investors outperform the market in the near-term.
Post-earnings drift is a phenomenon observed in financial markets where the stock price of a company tends to continue moving in the same direction as its earnings surprise in the period following the release of its earnings report. If a company’s earnings exceed market expectations, it is considered an earnings surprise, and the stock price may experience a positive drift. Conversely, if the earnings fall short of expectations, it may lead to a negative drift.
Investors can potentially profit from post-earnings drift by employing various strategies:
- Earnings Momentum Strategy: Investors can take advantage of the post-earnings drift by following an earnings momentum strategy. This involves identifying stocks with positive earnings surprises and buying them with the expectation that the positive momentum will continue. This strategy assumes that the market underreacts to the earnings surprise, and the stock price will continue to rise in the short term.
- Short-term Trading: Traders can capitalize on post-earnings drift through short-term trading strategies. They may initiate short-term trades based on the expectation that the stock price will continue moving in the direction of the earnings surprise for a certain period. Traders closely monitor the market reaction to earnings announcements and take advantage of any potential price inefficiencies resulting from the post-earnings drift.
- Options Trading: Options trading strategies can also be employed to profit from post-earnings drift. For instance, investors can use strategies such as buying call options or selling put options if they expect a positive post-earnings drift. Conversely, if they anticipate a negative drift, they may consider buying put options or selling call options. Options trading provides leverage and flexibility, allowing investors to profit from directional movements in the stock price resulting from post-earnings drift.
Fundamental analysis plays a crucial role in identifying potential opportunities for post-earnings drift. By examining the company’s financial statements, key performance indicators, and other relevant factors, investors can assess the quality and sustainability of the earnings surprise. Positive surprises that are supported by strong fundamental indicators may have a higher probability of leading to post-earnings drift. The opposite is true for earnings misses; deteriorating fundamentals could lead to lower prices.
It’s important to note that post-earnings drift is not guaranteed, and market conditions, investor sentiment, and other factors can influence stock prices. It requires careful analysis, understanding of market dynamics, and risk management to effectively profit from post-earnings drift. Investors should conduct thorough research, analyze earnings reports, and consider consulting with financial professionals before implementing any trading or investment strategies.
Investors can monitor earnings release and results with Yahoo’s Earnings Calendar.