By now, most of you are aware of LikeFolio’s famous Weekly Earnings Scorecard: a “tip sheet” that goes out every Sunday with earnings scores and trade ideas for every company reporting earnings in the week ahead.
Did we model this after a horse racing tip sheet inspired by a day at the track? Maybe. But this is our high-level view of every company reporting earnings and the metrics that matter.
So, before I look at the Earnings Scorecard and dive into individual companies, I like to “zoom out” and create a foundational thesis for the overall market and the consumer sectors that these companies are capitalizing on.
Here’s the 1-2-3 process I use to prepare for a (hopefully very profitable) earnings season…
No. 1: Be Mindful of Market Trends
Stocks made a nice recovery from their October lows but rolled over again in recent weeks.
And that perpetuated the overall market trend, which is down – for now.
When I’m constructing an earnings trade, I start with that overall market trend, since that can act as a headwind or tailwind for individual stocks.
As long as the S&P 500 remains in a downtrend, I’ll be leaning aggressively into our bearish earnings signals.
Should we see an upside breakout for stocks (we’re talking an S&P level of 4,050 or better), I’ll focus more on our bullish earnings signals.
That said, I understand the proverbial “one thing” that creates the hottest investing opportunities.
And that “one thing” is the consumer.
And what consumers are saying in their Twitter posts gives us a big head start on where those moneymaking opportunities actually are.
No. 2: Consumers are ‘The Force’ – Use the Force
If you have any doubt about the power of the consumer, remember this single data point: Here in America, consumer spending drives nearly 70% of everything that happens in our economy.
Consumer spending is like one big election, where wallet-based voting takes place each and every day. That voting separates the winners and the losers – with products and services, and with the companies that sell them.
A product that’s a big hit can do wonders for a company’s sales and earnings. And its stock price.
Understanding where consumer interest is hot – and where it’s not – gives you an enormous edge heading into earnings season, and with the trades you make.
To help you handicap consumer interest, there’s a little cheat sheet I made to use throughout earnings season:
View this cheat seat as a breakdown of where consumers are voting with their wallets – and where they’re not.
The green sectors (on the left) are seeing positive consumer traction – a tailwind for companies in those businesses. This could make corporate execs more optimistic – boosting the potential for an all-important “forward-guidance increase” when they talk about their full-year 2023 outlook.
The red sectors (on the right) are just the opposite. Consumers are cooling their spending in these categories, which means companies there could become more conservative for the year.
But it’s all about “balancing” guideline No. 1 and guideline No. 2.
If I see a negative earnings score on a company that is in a green consumer sector or a positive score on a company in a red consumer sector, I would probably play it more conservatively – or pass on it altogether.
However, if a company’s earnings score lines up with the overall consumer trend for its sector, I’ll move into the trade aggressively, seeking big profits.
This brings me to our third – and final – rule.
No. 3: Be Opportunistic
The beauty of LikeFolio’s research is that we can set up trades to cash in on consumer trends in publicly traded companies before they report earnings.
Here’s an example.
In early January, we saw bullish trends for binging favorite Netflix (NFLX): New subscriber growth was up 3% year-over-year (YoY), and viewership rose 8% during the same period.
While Netflix was gaining subscribers, rivals were hemorrhaging customers.
Major green flags like those naturally led to a bullish earnings signal ahead of the company’s fourth-quarter earnings report, which came out Thursday, Jan. 19.
Thanks to that early signal, we doubled down on our already-bullish thesis for the company and alerted readers to the opportunity on Jan. 13.
And boy, were we right.
The increase in subscribers translated to higher revenue. In a big way.
In fact, the quarterly report was so positive that Netflix shares spiked 8% on the news. And readers who followed our bullish recommendation were able to bank 112% gains in the space of just five days. And that is just one example.
Research like ours means we’re looking at big – scratch that – huge moneymaking opportunities every week of each earnings season.
It’s exciting, fun, and – we believe – very profitable…
Especially with this simple 1-2-3 plan in your back pocket.
Remember:
- Be mindful of market trends …
- Use consumer trends by sector to spot big profit plays…
- And be opportunistic.
We’ll see you on Monday…
Enjoy,
Andy Swan
Co-Founder, Derby City Daily