Should I Invest Before Earnings Reports?
You’ve done your research, picked out a great company, and now you’re ready to buy the stock. But what about the upcoming quarterly report? Should you invest before earnings are released?
Quarterly earnings reports can often be catalysts for your stock. A report that comes in above expectations can send your stock price sharply higher. On the other hand, a disappointing report can set off a major decline.
How do you grow your family’s wealth, while still protecting against the risk of a falling stock?
Advantages if You Invest Before Earnings
The advantages of investing before earnings depends largely on the market’s reaction to the earnings report.
If you’ve done your homework, you likely have a reason you expect the stock to trade higher. If that reason is based on the company performing better than current expectations, it may make sense to invest before earnings.
This way, if your research turns out to be right, the company could surprise to the upside.
Buying shares before earnings, in this case, gives you a chance to profit from the jump in the stock’s share price.
The key here is to determine if your research is strong enough to give you the upper hand. In other words, is the probability that your research will pay off (and the stock will trade higher) enough to justify the risk of your research being wrong (leading to a selloff).
As a general rule, I’m a fan of buying growth stocks or bullish trending stocks before earnings. These stocks typically already have favor from investors, and are very likely to keep going up if the earnings announcement is strong.
Disadvantages to Investing Before Earnings
Your decision to invest before earnings can backfire if a stock trades lower after the announcement.
Let’s assume you want to own this stock for the long-run. If you wait until after your stock trades lower (following an earnings report), you’ll be able to buy more shares. This can give you a better return once the stock rebounds, because your cost is lower and you have a larger investment.
Of course, the risk of waiting until after an earnings report is that you may not be able to buy at a lower price. If your expectation is wrong and the stock does not trade lower after the earnings report, you may miss out on a chance to buy before the stock moves higher.
I think it often makes sense to buy deep value stocks after an earnings report. This is because deep value stocks that have fallen out of favor often trade lower after an earnings report. Investors are conditioned to expect the worst and more willing to bail out of a stock.
If this happens, you’ll be able to take advantage of a lower price.
A Special Way To Profit From Earnings Uncertainty
One of my favorite earnings plays is to sell put contracts before an earnings report.
By selling a put contract, you’re entering an agreement to buy shares of stock. This agreement only lasts for a defined period of time. And your potential buy price (called a strike price) is set regardless of where the stock actually trades.
When you sell a put contract, you receive income immediately as payment for entering this agreement.
Payments are typically higher when there is more uncertainty. In other words, selling puts before an earnings announcement is a great way to earn more income from this strategy. You can also set your strike price at an attractive level, so you only have to buy shares if you get a discount price.
Best of all, you can use this strategy in your 401k. It’s one of my favorite ways to grow wealth in my own retirement accounts.
There is no black and white answer for whether to invest before or after an earnings report. But this strategy can be a great way to take advantage of the uncertainty and put instant income in your account.