This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Options Can Brighten Earnings Surprises

For the past few months, it seems like macroeconomic forces such as terror, inflation and interest rates have dominated investment decisions. Hopefully, now that Wednesday's Federal Open Market Committee meeting has settled the interest rate question for at least the next six weeks, investors can focus on upcoming second-quarter earnings reports.

Unlike trying to handicap what the Fed might do and then divine its impact on the stock market, earnings provide a more immediate influence. And they're ultimately the most important criteria in determining a stock's value.

While there is no way to know for certain how a company's stock will react following its earnings release, there is often a sell-the-news reaction. But according to research by Keith Miller, a quantitative analyst at Smith Barney, there are also discernable price performance patterns prior to the reporting date.

Specifically, he concludes that "the rewards from accurately forecasting earnings surprises are much greater in the two- to five-week period before the earnings report than they are in the weeks after." Miller's study shows that the top quintile of stocks in the Russell 2000 with the largest earnings surprises outperform the broad index by some 4 percentage points in the four weeks before they report.

Getting Surprised

The key, of course, to capitalizing on this price run-up ahead of earnings lies in the phrase "accurately forecasting earnings surprises." Thankfully, Miller has provided a glimpse into his (and Smith Barney's) quantitative methodology for finding candidates. His recent report describes the calculation for standardized unexpected earnings, or SUE, as the difference between the company's actual reported earnings and the mean of analysts' estimated earnings, divided by the standard deviation of the estimates. The higher a stock's SUE, the greater the expected surprise. This historic or realized SUE is based on the most recent 16 quarterly earnings reports.

1 of 3

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,614.81 +215.14 1.31%
S&P 500 1,941.28 +37.27 1.96%
NASDAQ 4,419.4780 +103.4040 2.40%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs