Stock Analysis And Event Risk In Equities

Imagine being long shares of a clothing retailer because you liked the short-term price pattern and felt that it was poised to break-out after some stock analysis. The following day one of its competitors had disappointing earnings and both stocks took a hit towards the downside.

Now, had you known how closely correlated both stocks were, and that one of them had earnings, you might have lightened up on your position or closed it out because you felt that earnings are a 50/50 coin toss.

In any event, a situation like this could have easily been avoided if you had just done your homework, i.e., better stock analysis. However, for the novice trader, these are scenarios that don’t even cross their mind. With that said, there are certain events that you need to be aware of before you decide to hold onto a position.

Let’s take a look at some of them.

Earnings

Many trading platforms today will have notifications on when earnings are. However, if yours doesn’t, it’s not the end of the world because that information is rather easy to find when doing stock analysis. For example, let’s say you took a long position in Gap Stores on November 5th and were considering holding it long for awhile. You could go to finviz.com and find their earnings information on their site.

(source: finviz.com)

As you can see, they have earnings on November 17. With that in mind, you’ll have to ask yourself if that can interfere with your thesis or not. In addition, you should also confirm by going to the company website and checking out their investor relations page.

(source: www.gapinc.com)

Generally, the company website is the most reliable source for dates such as earnings when conducting stock analysis.

Competitor Earnings

In some niche industries, how a competitor does on earnings could be an indication on how others in the same space might perform. In this case, the clothing retailers industry is one of those niche industries.

What you’ll need to do is look up the dates of competitors to see if they have earnings around the period you intend on holding your position. You can find a list of similar companies on finviz.com. For example, The Gap, Inc. is categorized as an Apparel Store.

By clicking on the apparel store link, a list of apparel stores will come up.

(source: finviz.com)

You’d simply sift through the ones that are similar to see if any of them have earnings coming up.

Industry Reports

Sticking with our example, some clothing retailers will share numbers ahead of earnings, like holiday sales numbers or even give out forecasts. Now, if you’re trading energy related stocks, you’ll want to be aware of the EIA Petroleum Status Report which is generally on Wednesday.

Economic Reports

If you’re trading home builders you want to know when new home sales are released. If you’re trading banking or gold mining stocks, you want to be aware when the FOMC or other central banks have meetings lined up. A basic economic calendar can be used to find this information out. For example, econoday.com does a nice job of laying out this information.

(source: www.econoday.com)

In summary, risk can be mitigated by simply making yourself aware of the events surrounding the stocks you’re trading. Of course, somethings we can’t predict, like when an analyst upgrades or downgrades a stock. But if it’s a known event, be ready and act accordingly after conducting stock analysis.