These Three Companies Just Hit the Earnings Trifecta

We’re in the midst of another stunning earnings season…

With over 80% of S&P 500 companies done with reporting, it’s safe to say that we’ll have our fifth consecutive quarter of double-digit earnings growth.

More than 60% of companies beat their revenue estimates… and 70% of companies beat their profit estimates.

These results are a large reason why the S&P has rallied 11% so far this year.

Earnings season can tell you a lot about the market. It’s a snapshot of the previous quarter’s performance and a forecast of what to expect going forward.

Today, I’ll show you how to get a read on which companies will outperform the market over the next quarter based on their earnings statements—and three standouts from this past quarter that are poised to do so.

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Successful Companies Keep Succeeding

In November 2018, I told you about four letters that have helped investors make money for half a century: PEAD.

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.

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

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

• Beat revenue estimates

• Beat earnings estimates

• Raise forward guidance

This is what I call the “earnings trifecta.”

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

At the Daily, we’re always looking for ways to beat the market. And finding stocks that just completed the earnings trifecta is one way of doing so.

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Last Quarter’s Trifectas

Last November, I listed four companies that had recently completed trifectas. And despite the tumultuous end to 2018, three of them beat the market during the past 100 days…

In this time frame, the market was up 0.5%, while these companies rose an average of 0.7%. While that’s not quite the 2% investors have historically earned from trifectas, outperformance is outperformance.

And that’s not bad, considering we just went through the worst quarter since the Great Recession in 2008.

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Betting on Trifectas Again

If you didn’t get to ride the previous post-earnings announcement drift, don’t worry. These three stocks completed trifectas of their own last quarter:

• Equinix (EQIX)

• Hilton Worldwide (HLT)

• Cardinal Health (CAH)

But remember, past performance is not a guarantee of future returns. Just because this strategy has worked before, doesn’t mean these specific stocks will outperform the market going forward. So position-size appropriately.

Regards,

Nick Rokke
Analyst, The Palm Beach Daily

P.S. Did you buy the last earnings trifecta? Let us know how you fared right here…

Readers have mixed feelings on whether the government should restrict corporate buybacks (See Tuesday’s issue, “Bernie Sanders’ Latest Socialist Plan Will Soak Investors”)…

From Mark J.: Marco Rubio is turning into a Republican In Name Only (RINO). He, AOC, and Bernie Sanders need to leave corporations alone. Maybe they should mandate that schools teach people about money and investing, so we’d all be better off.

From Danny T.: It seems like free markets only make the rich richer. Companies that make billions of dollars and pay their CEOs millions should pay their employees at least $15 per hour with benefits. The employees are the reason the company is running. Yes, companies might go to China for lower labor costs like Ivanka Trump did, but aren’t we all supposed to be against sweatshops?

From Angelo R.: Politicians should just let markets work with the least number of regulations that keep corporations on the up and up. This would allow all the shareholders to invest and/or spend their incomes on the things that keep people employed.

From Joanne C.: I don’t think the government should restrict corporate buybacks. I’m sick of our government intruding in our lives, where they have no business. If the government would stick to protecting its citizens, we would be a much happier nation.

And the mysterious death of a crypto millionaire has one reader concerned…

From David L.: I recently read Teeka’s interview about the mysterious “death” of crypto millionaire Gerald Cotten… and I’m concerned that my crypto funds could get stuck on an exchange as well. Do you have a tutorial on how to self-custody cryptos?

Nick’s Reply: We always recommend that, when applicable, you store your crypto funds in a wallet in which you control the private keys. Our PBRG crypto quick start guide will give you the basic steps for buying and storing crypto. You can download it here.

Do you have questions or comments for our editors and analysts? Send them to us right here…

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