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Post-Earnings Announcement Drift | Why You Should Bet on This Trifecta

Four letters have helped the world’s best investors make money for half a century: PEAD.

No, it isn’t a performance-enhancing drug (PED) taken by athletes or some cryptic code that helps investors trade better.

PEAD stands for post-earnings announcement drift.

Scholars Ray Ball and Philip Brown first documented the phenomenon in 1968. It refers to the tendency of stocks to continue rising for some time after an upside earnings surprise… and to continue falling after a downside one.

If you understand how this phenomenon works, you can find money-making opportunities on both the short and long sides of a trade.

Let me explain…

Companies with positive earnings surprises outperform over the next year. And companies with negative earnings surprises underperform the following year.

The companies that outperform the market achieve three criteria (companies that underperform do the opposite):

  • Beat earnings estimates
  • Beat revenue estimates
  • Raise forward guidance

I call this the “earnings trifecta”…

Multiple academic studies have shown that companies achieving this trifecta outperform the market by 2–4% during the following quarter. Annualized, that would beat the market by 8–16%.

Here, we share ways for you to beat the market. And finding stocks that just completed the earnings trifecta is one way of doing so.


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How to Play Trifectas on the Cheap

As I mentioned above, the earnings trifecta can boost stocks higher in the following quarter (the next 90 days).

Just check out these examples that popped off of great earnings from the previous quarter…

  • Biotech product development company Thermo Fisher Scientific (TMO) rose from $225 per share to $250 in two months—an 11% gain.
  • American Express (AXP) shares jumped 10% from $101 to $111.50 in two months.
  • And some smaller companies did even better. Alarm.com—maker of home security and automation systems—had its stock rise 25% the day after earnings.

These are great returns simply for holding for a couple of months. However, the current market is giving us an opportunity to make even more from the trifecta.

As regular readers know, the broad market dipped about 7% in October. And the good names fell with the bad.

For example, Amazon plummeted nearly 20%… Google over 15%… and Apple about 13%.

These are great companies. But profit-taking by traders punished them and many other high-flying growth stocks.


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Here’s the thing…

Growth stocks are often the ones that reach the earnings trifecta. So the recent sell-off gives us a chance to pick up stocks that had great earnings at a discount.

The table below lists four stocks that beat their earnings and revenue estimates… as well as raised guidance. But they’re still down from their October highs.

Company

Symbol

% Below 
October High

VF Corp

VFC

10%

Illumina

ILMN

8%

AMETEK

AME

8%

Northrop Grumman

NOC

13%

These four companies not only achieved the earnings trifecta last quarter—they’re firing on all cylinders, too.

When the bull market resumes, these stocks should soar as investors revalue them and push prices higher.

As always, make sure you do your homework before investing in any company.

 

 

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