Stock Ideas 
Investing Ideas Earnings, the Sentimental Season
Investing Ideas Earnings, the Sentimental Season 
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Last Thursday, Mechel OAO (MTL:NYSE) announced record results for 2007. Here’s a snapshot: * Revenues increased 52.0% to US$6.7 billion * Operating income increased 92.59% to US$1.4 billion * Net income increased 51.4% to US$913.1 million |
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| Earnings, the Sentimental Season |
| Thursday, 04 October 2007 | |||||||||
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Dear Reader, Tis’ the season … again. Call it whatever you want, but I prefer to look at it as a profit season or at least potential profit season. I’ve covered a few different views of earnings season trading over the past few weeks to prepare you for the upcoming target-rich trading environment. In profiling these winners and losers, I’ve introduced you to our unique approach of identifying large earnings season moves by gauging where true investor expectations lie toward a stock ahead of its earnings announcement. I focus on this behavior because “market value” is determined by investor perceptions, not necessarily the data found in earnings reports and other fundamental measures. This is why monitoring investor sentiment becomes key ahead of earnings season, as it separates perception from reality and allows us to profit from the divergence of the two.What should you be looking for as we approach earnings? Our Behavioral Valuation approach exploits the fact that investor actions tend to tip their hand on their expectations for a stock. As we head into earnings season, our various indicators monitor activity on individual stocks to identify how investors are posturing themselves ahead of earnings, which is key to behavior after the announcement. For example, signs that investor expectations are rising ahead of earnings could mean that a stock is at risk of seeing the “sell the news” crowd step in after earnings to knock the stock lower. These are situations to avoid, as the upside benefits of positive earnings are limited since investors have already priced the stock for perfection. Typically, the situation that benefits the bulls the most is one in which investors are posturing for a weak earnings report prior to a report that winds up being positive. This is when a stock usually rallies more than average, as pessimistic investors see the error of their ways and fuel the shares higher as they try to catch up to the stock price.That said, it is important to follow what we call our “rules of engagement” for earnings season trading. As these are so important, I figured that we should revisit these rules ahead of Alcoa’s earnings announcement next Tuesday. Behavioral Rules to remember during earnings season
Write these down and refer to them regularly, as these simple rules have stood the test of time when it comes to earnings season investing. 1. Avoid the temptation of running with the crowd. The crowd tends to get whipped into a frenzy ahead of an earnings announcement, as investors buy into a stock based on positive expectations. The stock price thus reflects ambitious expectations that are often difficult to meet. Under these circumstances, a stock with positive earnings is more likely to sell off since the behavioral value of the stock is bloated. 2. Look for the under-appreciated opportunities. Keep an eye on companies with low investor expectations headed into earnings. Keeping with the same mindset as rule number one, low expectations are easier to meet and beat. And when they are, we tend to see investors move in, driving prices higher. 3. Pay attention to rule numbers one and two. Subscribers to our IDE Earnings Alert benefit from the Behavioral Valuation approach with weekly reports that identify several tradable opportunities. I already have a few high-profit candidates working their way through my filters right now. To find out how you can profit from the opportunities provided by third-quarter earnings season, click here. Good luck with your trading, CJ P.S. To let me know what you thought of today's article, send an e-mail to: This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
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