Company Performance and EPS


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Video Transcription:

Hello, traders, and welcome to the Pro Trading Course and the third module Swing Trades: Follow Global Macro Trends. In this lesson, we are going to learn how to follow a company’s performance or a company’s stock price based on its fundamental. And it’s quite easy, actually. All you need to do is follow the past EPSs and company releases. And I’m going to show you a few examples of how the earnings per share releases affect a company’s stock.

But first of all, let’s talk about earnings per share. If you are trading stocks, you need to know if the stock is overvalued or undervalued. If the stock is overvalued, you are going to want to short the stock, and if it’s undervalued, you are going to want to buy the stock. Basically, you need to know if a company is performing or not.

Company Performance and EPS

The strength of a company’s stock can be determined by its earnings per share. This means that, for example, if the earnings per share of a company have been low or have missed the estimate, this means that this company is not performing, which means that the stock is going to be in a very bullish market.

Each quarter, every listed company releases its earnings per share, which is the portion of a company’s profit allocated to its outstanding share of common stock. Before the EPS is released, you have to look at the estimate, and this is what I was talking about. You need to understand that they are analysts’ estimates when it comes to earnings per share. You are not just not going to read the release of the company. You need to put that in comparison with the analyst estimates.

If the actual EPS beats estimates, which means that the EPS is higher than the estimates, this means that the company is performing, and bull pressure will manifest. This means that this stock will go higher. And if the EPS misses the estimates, the company’s stock will suffer, and price will drop quickly. It’s as simple as that.

But, I mean, you don’t have to be very close-minded. You have to look at least at a year worth of EPSs to really understand how a company is performing overall. And by looking at past EPSs, you can see if a company’s stock is worth buying or not. For swing trades, of course, you can always short-sell a stock if the stock is not worth buying.

Company Performance and EPS1

Now, I’m going to go right to the charts, and I’m going to show you an example of what I’m talking about. Okay, so here’s the WYNN chart. Wynn is a casino in Vegas, and here is its chart. And you can see down here that you have the earnings announcements, okay? For example, this earning announcement was with a… If I’m not mistaken, the actual estimates were $1.818 per share on earnings, and the actual, well, the actual earnings per share was $1.95, which is good, and the stock valuated.

But from this point, from February 2015 until February 2016, the stock dropped immensely, going from $190 per share to a low of $50 per share. So the stock dropped around $140 in a year. And I’m going to show you now each earnings per share, release of course.

Here on February 2015, the EPS was $1.43 on estimates, and the actual was $1.20, which means that the EPS missed the estimates. Right here, the estimates were $1.33 and the actual EPS was $1.66, which also missed estimates. And you can see that it dropped overnight from a close at around $130.53 to an open of $116.32, and dropping immediately on super high volume, you can see the volume bar on the back in blue, to a low of $180.26.

Okay, so this earnings per share release affected the stock immensely, and not only overnight and at the release, but also all throughout the quarter, dropping to a low of $93.43. Then it came on August, the next earnings per share release, and the estimates were 96 cents per share and the actual was 74 cents per share which was also bad. And you can see that the stock depreciated immensely to a low of $50.80 on that quarter.

Company Performance and EPS2

So you can see that, actually, the earnings per share release does not only affect the release date, but it will affect the stock over time. And right here, we started to have a better than expected earnings per share. The estimates were 75 cents per share, and the actual EPS were 86 cents per share. And right here, the estimates were 74 cents per share, and the actual EPS was $1.03. And you can see how the stock is starting to gain momentum to the upside.

Now, I am showing you this because if you want to trade stocks, you have to follow the earnings per share on a quarterly basis, because you are not going to want to buy this stock, for example, WYNN, in all 2014, I’m sorry, in all 2015. Buying this stock was a very, very bad move, all right?

The move here was to short-sell the stock for a swing trade, okay? Now, I’m not analyzing this chart right now. I’m just showing you how can you follow the performance of a stock and then decide if it’s worth buying or if it’s worth short-selling for a swing trade.

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