One thing I tell my kids all the time is: Nobody is perfect.
It’s OK if they make mistakes. I’ll make mistakes, they’ll make mistakes and we’ll all continue to have our flaws.
But there are a few flaws in life that you can profit from — big-time.
Analysts on Wall Street are the perfect example.
I know Wall Street is a high-and-mighty power in New York, with a lot of money behind it. But the analysts there are subject to the same human nature as the rest of us. They are far from perfect.
I’ve studied a specific pattern that Wall Street analysts have followed for decades now, and I’ve discovered the sweet spot on how to trade it.
The approach boils down to a simple concept. All you need to know is whom the analysts are really working for.
Then it’s easy to see why they are always behind the curve when it comes to their expectations.
Every quarter, when a company reports earnings, it’s obvious that no one knows what to expect.
The stocks’ 5%, 10%, even 20% swings on earnings prove that.
But what happens next is predictable — and lucrative. Here’s how.
Wall Street Analysts Are Your Key to Profits
The first thing to remember is whom Wall Street analysts work for.
While they are hired by big banks to track and analyze specific companies, they have to maintain a relationship with the management of the companies they cover.
Whether it’s Apple, Facebook, Google or another company, the analysts risk damaging those relationships if their expectations for earnings are too wild.
That’s a quick way to get the silent treatment.
So, instead, they give lowball estimates for earnings. That benefits the company because it’s easier to post better-than-expected results.
Sometimes, companies can’t even beat the low expectations. But the fact remains: Analysts want the management of these companies on their side. They can maintain that relationship throughout the quarter.
Now, we can’t really use this information to make a trade.
A company beating earnings expectations doesn’t mean the stock is going to surge on the news. Plenty of other factors affect price movement.
But it tells us what to expect next.
Don’t Gamble on Earnings
After a company beats earnings expectations, and the news is good enough to lift the stock, that’s our opportunity.
Now, the analysts who lowballed the earnings expectations to begin with have to answer to their boss at the big bank. They dig through the numbers again.
And what do you know? They revise their earnings expectations higher for future quarters.
This news helps lift the stock in the weeks after the initial earnings report.
The Wall Street analysts don’t increase their expectations right away because they have to review the new information in the earnings results.
This creates a delay in the rally — and creates a mispricing opportunity we want to capitalize on.
I have perfected this approach in my premium service, Quick Hit Profits.
We don’t gamble on earnings announcements. Instead, we capitalize on this anomaly after companies announce earnings.
Click here to go through my 30-minute training session to understand everything you need to know about my approach.
Chad Shoop, CMT
Editor, Quick Hit Profits