It’s earnings season, when companies publish the results of the prior quarter. Results that I’ve seen so far have been mixed. However, certain companies have had very positive earnings, better than expected, and their share price has reacted accordingly.

It seems that there are long, slow periods where a company’s share price does very little, responding mostly to the supply and demand of traders moving shares. If more people (or one large account) are buying, the price trends upward, and when ore people (or a large account) are selling, the price trends downward. But when earnings are released, the share price will often jump (up or down) to better reflect the underlying fundamental value of the business.

It makes sense, then, to own stocks around earnings announcements. If a company does worse than usual, it could be risky. But if a company surprises with better than expected earnings, an “investor” could be handsomely rewarded. This would seem most applicable to companies where good earnings seem likely, but would be a departure from the recent past.

Examples of this, recently, include Loblaws, Canadian Tire, CP Rail, Magna and Gildan. Within this list, Loblaws and Canadian Tire were genuine surprises. CP Rail, Magna and Gildan already showed positive momentum. This may be explained by pseudo-insider buying. For example, employees can see that business is good, even without being privy to insider information. Customers can see that prices are rising or availability is reduced due to increased demand. Stocks sometimes trend upward before a positive earnings release and downward before a negative surprise.

It appears that a momentum strategy is far from foolproof, while still being reasonably well positioned to take advantage of some positive surprises and to avoid some negative surprises.

Earnings Surprises

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