3 Strategies to Profit This Earnings Season

Nothing better than waking up to a positive earnings surprise and big profits.

Nothing worse than waking up to an earnings miss and heavy losses in your portfolio.

Well, fourth-quarter earnings season is now kicking into full gear, and there are few things that move a stock faster, up or down, than an earnings announcement.

This is especially true now as investor expectations and stock prices are much higher. Companies that disappoint this earnings season will be crushed. This will lead to devastating losses for those unfortunate shareholders. However, the owners of stocks with positive surprises will be richly rewarded. Now is the perfect time to align your portfolio to profit in the month ahead.

As most of you already know, Zacks Investment Research specializes in the coverage of corporate earnings. And more importantly, how to profit from this information. So, today I'm going to share with you 3 proven strategies to profit from earnings announcements.

(Hint: Be sure to read to the end as the 3rd strategy is by far the most profitable.)

Strategy 1: Four Leading Indicators of Positive Earnings Surprises

I figured its best to get the most obvious strategy out of the way first. The 4 leading indicators I refer to are the 4 factors of the Zacks Rank. Before you skip this section, let me share some information that you may not have known.

In the mid-1970s Len Zacks took his mathematical skills to Wall Street where his job was to discover stock-picking strategies that would beat the market. He had a simple theory that was the precursor to what became the Zacks Rank.

Len focused his research on finding stocks that were more likely to have a positive earnings surprise and that would jump on the news. The journey led him to what we know as the 4 factors of the Zacks Rank. Individually, each increases the odds of owning stocks that will enjoy a positive earnings surprise. However, when you combine them together inside the Zacks Rank, it becomes an almost obscene advantage for investors. (Learn more is this video: 4 Factors of the Zacks Rank.)

Strategy 2: Stop the Bleeding

This second strategy is so simple, yet so hard for most investors to do. So, I'm going to beat it into your head...for your own good of course ;-)

Sell All Companies with a Negative Earnings Surprise

Yes, sell it immediately. Even after it falls at the open. Even if it is for a substantial loss. Why? Better to take a 10% to 20% loss in the short run than a 20% to 40% loss in the long run.

Keep in mind how earnings estimates are created. Both company executives and brokerage analysts are doing their best to create conservative estimates that the company should easily beat.

And when they fall short of those watered down estimates, it points to one of two serious problems:

• Industry conditions have deteriorated and thus they missed their forecasts. This problem will most likely not correct itself in the near-term, leading to further disappointment.
  
  
• Company leaders are incompetent. Meaning they are no good at estimating their own earnings. Or that their strategies for growth are ineffective.

Either reason should give you ample cause to abandon the stock now and move on to greener pastures.

Strategy 3: Buy High and Sell Higher - Most Profitable Strategy

I saved the best for last. This strategy has proven to be the most profitable way to harness earnings surprises. This proprietary metric is called the Price Response Indicator, or PRI.

The PRI is amazingly accurate at saying which stocks will rise in the days following an earnings announcement and which won't. Proving the truism: "Buy High and Sell Higher".

The scoring system for the PRI correlates the percent earnings surprise and short-term price reaction preceding the announcement. The model scores stocks from A to E, with A's and B's being the most likely to increase in price in the days following the surprise. These signals are produced by our systems within hours after the company reports earnings.

Stocks that are rated a PRI of A or B certainly had very strong positive earnings surprises. Even more importantly, most of them had declined in price in the days preceding the announcement. This is the key ingredient because it means that the investment community was wrong about the company's prospects.

These stocks will gap up on the news, yet still there are more gains to be made as the good earnings news spreads through the investment community. Our extensive research clearly shows that these stocks will receive extended buying pressure for about 2 weeks after the report. This gives traders ample opportunity to make consistent profits even after the stock has gapped up on the earnings surprise.

How to Profit from PRI

At this time the daily feed of PRI signals is only made available to our institutional clients. However, the Zacks Surprise Trader service filters down all the PRI signals with additional variables to find the 2% that have historically provided the best returns. From there we hand pick the signals, turning down 5 out of every 6 to provide our subscribers with a phenomenal opportunity to beat the market.

How phenomenal? Since inception in May 2006, Surprise Trader has generated a +33.9% return versus a devastating loss of -7.0% for the S&P 500. Just imagine how well it will perform in the future as we leave the bear market behind.

Today is the perfect time to learn more about the Surprise Trader. Why? First, because earnings season is coming into full swing. Second, because the service has grown so popular that it's closing to new members. It's being held open until midnight Saturday, January 23, 2010, to give Zacks.com members one more chance to join the service and also save money.

Learn more about Surprise Trader special offer.

I hope you take advantage of all three of these strategies to not just survive this earnings season...but thrive this earnings season.

Good Investing,

Stephen Reitmeister

Steve is in charge of Zacks.com and all of its subscription services. He created Zacks Surprise Trader in 2006 to help investors harness the combined power of the Price Response Indicator (PRI) and the Zacks Rank. About Zacks Surprise Trader.Zacks Investment Research