The secret of Earnings Reports, Netflix up next, how will you do?

Updated: Jan 20

Update,


Netflix tops 200 million subscribers with year-end flourish, stock jumps 10%



Trade it, buy it, sell it, watch it ,do nothing?

Netflix kicks off the new tech earnings 2021 season tomorrow after the market’s close, offering results that will be closely watched as the industry gets ready to transition to a post-COVID-19 economy and the new post Trump era.

Earnings reports are here again and if you are interested in the financial markets you will see that the headlines begin days before the biggest companies announce how they did in the last three months. Just as importantly they will also release a statement as to what the believe the next three months will bring.

These statements and data disclosures are important to institutional investors to navigate their portfolio’s, either selling and buying but often their investments have already been planned prior and the outcome of such reports will have been factored in long before. Nonetheless, such reports often bring keen interest to a trader.


Analysists and financial commentators will be vying for your attention with their views, opinions and forecasts. The bottom line is they want to gain your interest, as we do, for our own benefit.




Facts.


Netflix added 2.2 million global subscribers in the third quarter of 2020 — significantly lower than both Wall Street’s estimates of 3.4 million and its own company forecast. (For comparison, Netflix added 28.3 million new subscribers in the first three quarters of 2020.)

Are other streaming companies taking a piece of the pie? I see amazon has introduced English Premiership football to their product, as an example.

In general however, the overview is optimistic for the stock and its upcoming data results mainly due to the increase in demand as we stay at home and being perhaps the only medium bringing new content to audiences, even my mum watches the Crown!


Morgan Stanley analyst Benjamin Swinburne stating,

“Following the accelerated streaming adoption of 2020, Netflix this year is reinforced with unparalleled global scale and an even stronger competitive advantage that supports continued share gains in the broader $500 billon TV market,”,


“With consumers staying home amid colder weather & limited social activities, we expect Netflix engagement to remain high.” — said Cowen analyst John Blackledge, while maintaining an outperform rating and raising Netflix’s price target to $650 from $625 on Jan. 7.


Ok, whatever the opinions, it looks like a strong tech stock going in the right way for the foreseeable future.


However, what about trading it.

When it comes to speculating, most day traders love the opportunity to trade such reports because they often cause volatility. In simple terms


Volatility in trading is a measure of the frequency and extent of changes in an assets value. ... More volatility means more trading risk, but also more opportunity for traders as the price moves are larger.


Yes, potentially greater risk but potentially bigger opportunities.

We write here to highlight the earnings report reaction in the short term to the initial data release but the adage that the trend is your friend is important, the markets react to news and data over a longer period of time.

Risk reward.

If you have read some of our previous blogs you've seen how earnings releases work. It's like a big deal on the day and as stated it comes with hours, and sometimes days, of endless experts providing their predictions of what the numbers will look like, and other experts providing their strategies of how to invest or trade based on the news. Yes, we sell it big time.


The big question, is there money to be made in earnings announcements?

As with everything associated with the markets, there are a array of opinions, and it will ultimately come down to individual choice, experience and ultimately results.

S&P 500 companies that beat their earnings forecast in the first quarter of 2012 was over 70% and according to the Bespoke Investment Group, the average one day change to these stocks was 0.47%.

Taking a risk to gain only 1/2 percent may not seem worth it but traders know that the average stock isn't the type of stock they're after. Instead, they're looking for a stock like Apple that rose $50 the day after they reported amazing earnings. This represented nearly a 9% gain from the day before.

With leveraged trading, that’s a big deal!

But Apple is hardly the most impressive; 17 companies saw gains of more than 15% the trading day after their earnings announcements. Notable companies like Amazon rose 15.77%, Cirrus Logic rose 18.62% and Expedia rose 26.53%.

If a trader could lock a payday like Apple, or one of the 17 companies that added sometimes as much as 25% to their stock price, it seems that the odds would be in the favour of the investor, since seven out of every 10 S&P stocks beat their earnings forecast.


There is a fundamental problem with the short term, it is exactly what it says on the tin, stocks have the ability to change direction rather quickly and holding the position after a big movement can be wrong, the price may correct quickly after the report and wipe out any gains you made. The trend if your friend as we say.

There are numerous strategies to trade a earnings report, one is to try to anticipate the result.

The truth is that we don’t really know what the data will be, whatever the analysts write. There is no scientific way to forecast the report or how investors will react unless you have insider knowledge 😊.

Good traders know that trading is largely about managing risk and they will implement several techniques to gain during a trading report, such as trading a short correction or following a trend after the report has been digested by the market and the volatility subsides.

For those who wish to trade earnings announcements, the best strategy is not to try to make it an all or nothing endeavour. Don't look for the big score, but instead look to get a piece of the gains, so that if the trade doesn't go your way, you're also only incurring a piece of the loss.

Let’s get real

Fundamental trading has risks, as we often mention, but if you can find the right trade at the right time, rewards can be massive.

Many traders believe that trading earnings announcements provide an attractive risk/reward proposal.

Betting on stocks that are expected to beat earnings expectations does increase the odds of success but if your wrong, you need to employ several strategies to succeed, don’t put all your eggs in one basket.

Undecided, don’t worry, your pension fund manager or even Government will buy such stocks!

You can always practice reports trading via a demo and see how you go.



Kyri Kyriacou, over 25 years working for leading banks and brokerages. Focused on providing top-notch trading & investing ideas to our clients @ Insiderkk.com

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