Posted April 24, 2023
By Zach Scheidt
Should You Invest Before or After an Earnings Announcement?
"Should I wait until after an earnings report to buy shares?"
I've heard this question a few different times recently, so I thought it was a topic worthy to discuss here.
After all, we're in the thick of earnings season, with about one-third of the S&P 500 companies reporting this week. And a similar number of companies report their results next week.
In other words, it's a very important time for us as investors, because we're learning how companies are performing in today's turbulent economy.
So let's think carefully about whether you should make major investment decisions before an earnings announcement, or if you should wait until after the company reports.
First, Know Why You're Investing
There may not be a clear-cut right or wrong when it comes to buying a stock before an earnings announcement.
But depending on your reason for buying and the time frame that you intend to hold your position, it gets a little easier to make the decision.
Here at Rich Retirement Letter, we talk a lot about long-term investing. We look at companies we expect to grow over the next few years, or sometimes even over the next few decades.
For investments like these, one quarter alone doesn't usually make a huge difference in the course of our investment.
We may get a slightly higher or lower price depending on when we buy. But over the next few decades, our gain or loss will depend on many different quarterly profit announcements.
As you already know, I'm a big fan of dollar-cost averaging for long-term investments.
That means if you're planning to invest $5,000 in a stock, I suggest dividing your capital into three or four different baskets and investing some now, some in a few weeks, and some farther down the road.
Using this approach of dollar-cost averaging helps you diversify your entry price.
By putting some money to work before an earnings announcement and then some after, you’ll either profit if the stock moves higher or get a better price on your second purchase if it moves lower.
So that's typically how I think about long-term investments around earnings season. But the thought process can be different if you're a more active trader.
Cashing in on Quality Research
While long-term investing can help you build wealth over time, skillful short-term trading can help you accumulate profits more quickly.
That’s especially true if you have an edge from an indicator, statistical trading methodology, or professional experience in the market.
For my family's trading, I often buy in-the-money option contracts to take advantage of short-term moves in a particular stock.
No, I'm not talking about day trading, which is a very difficult way to make money.
I've developed a system to capture large gains from stocks over a few days to a couple of weeks. (I'll have more to share about this strategy soon.)
For these shorter-term trades, I do a lot of heavy research to understand how economic trends, company fundamentals, and technical patterns are likely to drive a stock's next move.
And this research often pays off when a company announces earnings. For instance, my research recently told me that Tesla was falling out of favor with investors.
Rising competition, price cuts, and a high-value stock price made shares vulnerable to a sharp selloff. And that's exactly what happened when Tesla announced earnings last week!
I locked in profits on options that benefited from Tesla trading lower. If I had waited until after the company announced earnings, I would have missed out on the profits.
Plan Your Trade and Trade Your Plan
The best long-term investments and short-term trades occur when you create a plan ahead of time.
This means understanding why you're buying a stock, what you expect to happen, and how you will know if you are wrong. (Spoiler alert... We all get it wrong sometimes.)
If you’re buying a stock because you expect the company to grow earnings over time, it can be a good idea to own the stock before the earnings announcement.
That way if you're right and the company reports strong earnings, you benefit from the trade.
If you're expecting a short-term move lower for a stock and shares jump higher after an earnings report, that probably means your analysis was wrong.
Cases like this require humility. And the best course of action is to close a position that isn't working out and move on to the next opportunity.
Bottom line, as we work our way through another earnings season, make sure you keep an open mind…
Pay close attention to the information that evolves…
And be willing to shift course if details on the ground change.