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A Trading Strategy For Earnings Season

Trading

It’s that time of the quarter again! Earnings season is well underway, and we will see fourth quarter 2017 results from many energy companies next week. Friday will bring a few “big oil” results, with reports from Exxon Mobil (XOM) and Chevron (CVX) as well as Phillips 66 (PSX), so now is a good time to take a look at what to expect, and to look at the best strategy for traders going into the releases.

The consensus forecasts for XOM, CVX and PSX are for earnings per share of $1.03, $1.06, and $0.87 respectively. Not surprisingly given that oil spent almost the entire quarter marching up, all those numbers represent a significant improvement on the same quarter in 2016. What matters in an earnings release, however, is how the company performs relative to those estimates rather than versus last year. On that basis too though, there is evidence that going into earnings long of all three stocks makes sense.

First and foremost, you should keep in mind that on average around two thirds of companies’ earnings beat expectations. I have written on that subject here before, but it is a product of the tendency of CEOs to try and under-promise and over-deliver, and the fact that analysts naturally base their estimates off corporate guidance, at least to some degree. Add in the fact that for those analysts missed opportunity for their clients due to underestimating earnings is a lot better than those clients losing money due to an over-optimistic forecast,…

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