5 Simple Steps to Finding Monster Earnings Trades

Module Two, Lesson 4 ESTIMATES

Jamie Dlugosch

The Earnings Player

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Step 4: ESTIMATES As you know earnings is a numbers game. Wall Street loves to manipulate the numbers and even corporate management will try to guide analysts to ensure earnings “beats.” That's why we must take a deeper dive into the estimates page in our search for big gain earnings trades. What does it all mean?

When looking at the estimates page, we need to take a broader look at earnings estimates. Look at all the numbers, the estimates for the current quarter, the estimates for the current fiscal year, next year's earnings estimates. Then look at the different slices of analysts' estimates over time. What are the estimates today? What were they seven days ago? How about 90 days ago? Then ask yourself questions about these estimates. Each estimates page tells a different story.

I would start by asking yourself three questions when you're analyzing the estimates page. First, how does the company perform against the number? What is its track record in reporting earnings? Then, I would find out if Wall

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Street estimates are changing. Finally, how do estimates conform to the current market narrative and moves in share price? This helps us identify market inefficiencies that we can exploit with a well-timed earnings trade. Let's look at a couple examples.

Going back to Delta Airlines, what is Delta's performance against the number? We see here on the estimates page, that for four straight quarters Delta beat expectations. Last quarter they beat by three cents, before that it was a six-cent beat. This trend of beating the number can be expected to continue in the current quarter. How about Wall Street estimates changing? Well, for Delta earnings per share trends have been increasing.

We can see that the current estimates for the fiscal year ending December 31st, 2016 is $6.37 per share. 30 days ago, that number was $5.75. That's a big change, and a positive for the stock.

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Finally, how do estimates conform to the current market narrative? Well in the case of Delta, we've had share price movements downward recently, and a sideways stock over the last 12 months. At the same time, the company beats earnings estimates and analyst’s estimates are rising. This is an inefficiency that we should exploit during earnings season.

Next, let's take a look at a company called Everi Holdings (EVRI).

What is Everi's performance against the number?

Well, Everi has matched or exceeded expectations in three of the last four quarters, and we can expect that trend to continue in the current quarter.

Are Wall Street estimates changing for Everi? Well, indeed they are. In fact earnings per share for 2016 changed dramatically.

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You'll see here for 2016 the current estimate is only 68 cents per share, when 60 days ago the estimate was for the company to make $1.01 per share. That's a big change; we need to do a deeper dive to see what's going on.

When you look at the estimate page, you can see that for Everi, there were five analysts covering Everi stock, and one of those analysts gives us the low estimate of a loss of 33 cents per share in 2016.

This is a dramatic change from everybody else's opinion that has the company making over a dollar a share for the year. That's what's dragging down the average estimate to 68 cents. What about estimates conforming to the current market narrative for Everi? You can see from looking at this three month chart, Everi shares have dropped dramatically.

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This does not conform to a company that consistently matches or beats estimates, and where we can explain a drop in earnings estimates from an outlier estimate from one analyst. Again, this is a market inefficiency that earnings traders can exploit.

US Sil ica (SLCA) Finally, we'll take a look at US Silica, ticker symbol SLCA. What is Silica's performance against the number? Here, we have a company that's matched or missed estimates in three of the last four quarters.

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The performance against the number is not very good. Are Wall Street estimates changing for Silica? Indeed, analysts' estimates are lower for 2016 compared to 2015.

Now we've talked before about how investors prefer to buy stocks of companies that are growing profits, and sell stocks of companies where profits are dropping or in the case of Silica, they're going to be losing money. Does the estimate page conform to the market narrative? This one is

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very interesting; looking at a two year chart we see a dramatic drop in Silica shares in the fall of 2014. That's when oil prices first began their dramatic plunge. In 2015, December in particular, oil prices plunged again.

But this time, the reaction to the stock was much more muted. Here again, we have a company that misses estimates most of the time and a share price that's moved sideways to a bad news situation where the company's expected to lose money in 2016 compared to 2015. In this case we have a market inefficiency, the stock's doing better than one would expect based on analysis of the estimate page. It's an inefficiency that earnings traders can exploit.

So in analyzing the estimates page there's lots of information you can gather for your earnings trading. How the company performs against estimates in the past can be predictive of the future. We need to analyze estimates that are changing and understand exactly why those estimates are changing or how they're changing.

Finally, by asking the question of does the estimate story conform to the market narrative, we identify inefficiency that earnings traders can exploit. In the next lesson we're going to tie everything together with one final piece, confirmation. Specifically, what computers can't do that you can do that lead to big gain earnings trades.

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