An Earnings Strategy That Blows Up EMH
The “efficient market hypothesis” (EMH) is so popular, it is taught in business schools around the world.
It’s a belief that the price of any stock reflects all the available information.
If the market prices in all the information for a stock, as soon as it’s available, then there’s no way to gain an edge.
There’s no way to beat the market.
They want you to just sit back, own an index fund and be happy with your returns … accept the EMH as gospel and ignore anyone saying otherwise.
Well today, I want to show you my earnings strategy — it blows up the idea of an efficient market.
If EMH were true at all, my approach wouldn’t have a chance to make any money.
And yet, my readers had the chance to make 294% on part of a trade last week.
How? Let me explain…
Earnings Make Waves — And Hand Us Opportunities
Publicly traded companies — companies listed on the stock market — are required to report their earnings to investors every three months.
Earnings reports are big events for stocks. It’s a whirlwind of information. Everything from revenues, ballooning costs, CEOs attitude and the market sentiment. They occur four times a year, and you’ll see the biggest price moves around this event.
Investors try to price in the news that earnings reports dump into the market. But sometimes, they get it wrong.
See, the EMH would lead you to believe that when the market reacts to earnings, the stock is fully pricing in all of the information at once. That means there’s no way to beat the market … right?
But, after years of studying stock market earnings, I’ve been able to flip this on its head. I’ve pinpointed a shortlist of stocks that Wall Street misprices after earnings.
Mispricings that, according to the EMH, simply don’t exist.
But time after time, we are able to find stocks that are mispriced after all of the information is available. And the stock can be mispriced for up to two months as Wall Street races to catch up to the data dump from earnings.
That leaves us a window of opportunity if you know where to look: the Profit Window.
We’ve Found a Way to Profit
Wall Street has a habit of failing to fully account for earnings, but not in every stock…
I’ve studied hundreds of companies looking for this anomaly. And I learned it only happens on about 1% of all publicly traded stocks, a rare phenomenon that we can take advantage of every earnings season.
Last week we grabbed a 294% gain on the first half of one of these trades in just two days.
And they want us to believe the stock was fully valued on the earnings announcement? What a joke.
There are plenty of profits just sitting there for the taking. You just have to look at earnings as an opportunity instead of being too late to the trade.
In our trade that delivered that huge gain, the stock jumped more than 30% right after a great earnings report.
According to the EMH, the stock should have been fully priced and there would be no edge after that.
No one told the market that as the stock surged another 30% the very next day, and more than 10% the day after that (when we sold half of our trade).
My point is that the mispricings only became obvious after earnings were announced.
Betting before the announcement is nothing more than gambling with your money.
Why do that when you can score triple-digit profits with ease by jumping in after the big event?
Later this month, my colleague Charles Mizrahi and I are going to peel back the curtain on this earnings approach. Revealing all the details that have made it successful over the last four years.
It’s a presentation you don’t want to miss.
Chad Shoop, CMT
Editor, Quick Hit Profits
Investing has consumed my life since college. While double majoring in finance and economics at the University of North Carolina at Greensboro, I founded the university’s economics club, joined the finance club and participated in the Chartered Financial Analyst research competition to represent our school.