Trade Alert: Earnings, 6/5/2023

Two bullish trades and one bearish trade on companies reporting Tuesday.

The subject of one of our trades is the company that ones the Donna Karan brand.

Expected Surprise Prediction

The starting point for these earnings trades is social data, which is essentially an analysis of social media mentions of the relevant brands and how they typically translate into sales trends. An oversimplification to illustrate: if thousands more people posted that they love their new Tesla Model Y in the 1st quarter than in the 4th quarter of last year, that would suggest Model Y sales were up on a quarter-over-quarter basis. Over time, research suggests that social data can give investors a slight (greater than 50%) edge in trading earnings, but I’ve been looking at some other data sources that might increase our odds a bit.

For example, a recent company that social data got wrong was Abercrombie & Fitch (ANF 0.00%↑). One indicator that got ANF right though was the Zacks ESP or Expected Surprise Prediction. Basically, this is a comparison of the most accurate analysts’ earnings estimate revisions compared to the consensus earnings estimate. An ESP of 0% means Zacks expects no earnings surprise, while a positive number ahead of the % means Zacks expects a positive earnings surprise, and a negative number means it expects a negative earnings surprise. In the case of ANF, Zacks ESP was positive while social data was negative, and ANF indeed posted a positive earnings surprise. So going forward, I’ve added this check to our earnings trades: if Zacks ESP points in the opposite direction, I pass on the trade. For the trades we’re placing today, Zacks ESP is neutral on two of them and bullish on one of our bullish trades.

All together, I’m going to present you with a few different indicators you can consider when you decide whether or not to participate in these trades (I placed all of them personally, but my risk tolerance is likely different than yours): Zacks ESP, Chartmill aggregate Fundamental and Technical ratings, and Portfolio Armor options sentiment.

Details below.