Look, I'm gonna tell you something that'll probably make you think I've lost my mind: I buy stocks AFTER they gap on earnings.
Yeah, you heard that right. While everyone else is trying to predict these moves before they happen - spoiler alert, they can't - I'm over here using my three-step formula to catch lightning in the bottle after the dust settles.
Here's the thing about earnings moves - they're almost entirely random. Except when they're not. And that's where my formula comes in.
You see, most traders get caught up in this whole whisper number game. Google just ran from $172 to $190 in two weeks before earnings. Tesla went from $288 to $340. Everyone's pricing in some magical beat, right?
But here's what kills me - if we're already pricing in an earnings beat through this pre-earnings move, what happens when they actually report? You get skewed results. They beat the published estimates but miss the whisper number that's already baked into the price. Boom - you give back that entire pre-earnings run.
I've seen this happen time and time and time again. That's exactly what happened to Google right here on this chart - pre-earnings move, then we missed and gave it all back.
So forget trying to predict moves. My formula works AFTER the gap. It's dead simple but most people miss it because they're too busy trying to be fortune tellers.
Step 1: Beat EPS and Revenue
This sounds obvious, but here's what you need to know - about 70% of companies beat EPS historically, only 60% beat revenue. So when they miss? That's actually a big deal because the baseline expectation is they better beat both.
Step 2: Raise Guidance
The company has to say "analysts are expecting this, but we expect better." And here's the kicker - I don't care how much of an expert you think you are, you do not have the access and timing information that institutions have.
Step 3: Price Goes Up
The movement in price is a big determiner for whether it creates an opportunity. All three have to happen: beat, raise, and the stock has to actually respond positively.
Now here's where it gets interesting. This formula works on any company, even the ones where traditional fundamental analysis breaks down. Utilities? Financials? You can't use traditional weapons on those, but this three-step process? Works every time.
Take Google's setup right now. They've got 24% earnings growth over the past five years, projected 15% for the next five. Margins are insane - 58% gross, 32% operating. This is clearly a growth stock, not a value play at these levels.
But if they hit all three steps tomorrow after the close? I'm looking at a 10% move to about $210 - right back to those prior highs.
Tesla's even more interesting. Yeah, it's priced at 169 times next year's earnings - whatever you think about Tesla is already priced in. But they're expecting a massive rebound next year. If they can reaffirm that growth and raise the bar tomorrow? We could see $450. That's a 20-30% move.
The beauty of this system is it removes all the guesswork. No more trying to predict if they'll beat by 2 cents or 5 cents. No more getting killed by earnings surprises. You wait for the three-step confirmation, then you ride the momentum.
Is this easy? Hell no. Can you predict exactly when it'll work? Nope. But when you capture lightning in the bottle - like I did with Kohl's at 40 cents that closed at $1.90 - those huge returns make up for all the times you pass.
The market's at extremes right now. Only 60% of companies are above their 200-day moving average while we're testing all-time highs. That tells me we've got limited participation. Dangerous territory.
But that's exactly when this formula shines. When the market gets volatile and unpredictable, you need a system that works with the chaos, not against it.
By Brandon Chapman, CMT