Shorting Stocks that Miss Earnings Expectations



I have found over many years of trading that it is so much more difficult to make money shorting stocks than going long. With the exception of the bubble between 2000-2002 and the bear market of 2008-2009 during the Great Recession we've been in a bull market for a long time and trying to short stocks in a bull market is like pulling teeth. However, just like it makes sense to seek out companies that beat earnings expectations as long candidates, you might want to consider seeking out companies that miss earnings expectations as potential short candidates.

To set the stage, at EarningsBeats we not only track companies that beat earnings expectations; we also track those companies that miss their numbers. And these are stocks that could become short candidates on any rebound after any initial pullback.

As an example, Jack in the BOX (JACK) recently reported their earnings and missed on both the eps and revenue sides. Accordingly the stock sold off sharply then rebounded some to a level that resulted in a short trade alert to our members. 

As you can see in the above chart, once the stock bottomed on May 14 it went into consolidation mode before bouncing and testing its 50 day moving average unsuccessfully for 3 days in a row. So we issued a short trade alert with an entry price of $85.50 with a price target to the downside of $80.50 and a stop (cover) of any Intra Day move above the 50 day, at the time in the range of $86.15. This resulted in an 8 to 1 reward to risk opportunity. So if the trade works the way we think it can it would be a gain of close to 6% while if it goes against us the loss would just be 0.7%.  I like those odds.

Another way to think of this is just like traders flock to those stocks that beat earnings estimates they tend to steer clear from those that come up short. But it takes patience to let a stock come off a bottom to a key price or technical level before putting on a short. If you would like to see a sample of our Earnings Misses Chart List just click here.

It's still tough to succeed in shorting in a bull market but your odds might increase if you seek out companies that miss their numbers rather than trying to short companies that beat expectations and rise because you never know how high a stock might climb if it builds momentum before it runs out of steam. And as usual if you maintain tight stops in case a trade fails you will preserve your precious capital for the next high reward to risk opportunity that comes your way.

At your service,

John Hopkins

Subscribe to ChartWatchers to be notified whenever a new post is added to this blog!
comments powered by Disqus