Trio of Earnings Indicators
indicators for trading before and after earnings
Earnings Whispers was launched in 1998 and it wasn't long after that Bagnoli, Beneish, and Watts published their report in the Journal of Accounting and Economics titled "Whisper Forecasts of Quarterly Earnings per Share". This paper pointed out that the Earnings Announcement Premium and the Post-Earnings Announcement Drift was greater based on whisper numbers than consensus estimates. A few years later, we launched a trading service using strategies for trading ahead of earnings and after earnings identified in the Bagnoli, Beneish, and Watts paper.
The strategies quickly proved successful, but a new problem was revealed - too many trades were being identified. During the earnings seasons in 2002, it was not uncommon for there to be in excess of 40 two-day trades being identified at one time. In 2003 we started manually removing trades from our lists based on a number of factors, but while the strategies continued to be successful, we often removed some of the best trades from our list while leaving unsuccessful trades. So, in 2009, we started investing thousands of man-hours into researching what makes for the best moves in either direction around a company's earnings release. The goal was to give us a single quantitative measure for removing trades less likely to generate alpha while leaving those with the best odds.
Five years later, we had developed two tools for balancing the expectations of professional buy and sell-side analysts with the sentiment of individual investors that gave us a meaningful edge when trading ahead of earnings; and when compared to actual reported results, a significant boost to our short-term trades after a company's earnings release. Plus, our research stumbled on something new as well. We learned that much of what makes stocks drift higher or lower in the short-term after earnings also causes the stocks to continue moving in the same direction over the next 90 days until the next earnings release. Unbeknownst to us at the time, we were backing into Richard Bernstein's Earnings Expectation Life Cycle and a quantitative measure for identifying the longer-term Post-Earnings Announcement Drift.
Perhaps what makes these tools so valuable though is that they are based on data during two stock market crashes, a mini crash, two large bull markets, and a closing of the stock market - scenarios not seen in the 1990s. We've shown that alpha can be generated regardless of the overall market.
We spent part of 2014 and the beginning of 2015 putting these indicators into a tool available for investors and traders. The EarningsWhisper Score identifies those stocks that are most likely to trade higher or lower going into a company's earnings release. The Power Rating identifies stocks with the most potential for a short-term drift in either direction following a company's earnings release. The EarningsWhisper Grade identifies the likelihood of a longer-term Post-Earnings Announcement Drift - approximately 90 days.
More information on each indicator is available by following the links below.