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We all know that – in the end – earnings drive share prices. And most people understand the impact that beating earnings estimates can have on a company's stock. Just look at the way the financial media will dissect the information and report the highlights – sometimes to the point of redundancy. But there's another earnings event – one far off the media's radar – that is much more powerful. That's why I want to show you how to find them today.
These "sparks," as you'll see, actually allow you to get in ahead of the Big Boys.
And that's when the magic begins…
A "Green Light" for Big Gains
Analysts' upward earnings revisions just don't get much press. That's mostly because earnings revisions aren't as sexy as when a company like Apple Inc. (Nasdaq: AAPL) blows the doors off expectations.
Here's a 60-second breakdown of how earnings estimates are derived, in case you're not familiar with them.
An analyst identifies a catalyst that has yet to be priced into the market. These catalysts could be any one or a combination of improving trends in recent earnings, or upbeat management comments to the public, or the announcement of a key contract or new technology, or an improvement in the macro-economic condition of an entire industry, just to name a few.
Once the analyst identifies the catalysts, he can go to work crunching the numbers in order to come up with new projected earnings and price targets.
It doesn't really matter why the estimate was revised – as long as it's logical, and indicates the potential for future profits is greater than it was before.
Once the estimate is revised, the analyst puts together a report – complete with the rationale behind the improved estimates – and sends it out to institutional investors and preferred clients.
The new estimate is added to the existing group of estimates, and an average consensus estimate is generated.
When the consensus estimates are improving, it indicates analysts are expecting earnings to improve – and that catches the eye of institutional investors (or the Big Boys, as I like to refer to them) who have literally trillions of dollars to invest.
Put the Big Boys to Work for You
Here's where the fun starts.
Unlike you and I, the Big Boys can't just go out and establish an entire position in the click of a button or a single call to a broker. Instead, they need to strategically build that position over time in order to not push the price up too high, too fast.
Because of that, it can take institutional investors weeks – and even months, in some cases – to fully build a position.
Now, multiply one institutional investor by 10, 20, or more and you've got a rally under way that can last months and push a stock price to new highs – making a lot of money for investors who were savvy enough to get in ahead of the big boys.
That's one of the goals in my Small-Cap Rocket Alert – to get in ahead of the Big Boys and establish positions in exciting small-cap opportunities. And one of my favorite strategies is to focus on companies with improving earnings estimates.
It's really pretty straightforward. If earnings are being revised to the upside, then there is a pretty darn good chance that there is a new catalyst pushing those revisions higher.
My team uses a lot of expensive data feeds in order to track earnings estimate trends – but you can track them on a company-specific level using a free service such as Yahoo! Finance.
Let me show you how…
About the Author
Sid is the investment community's best-kept secret. Since 2009, he's served at Money Map Press as Director of Research, analyzing thousands of securities and profit opportunities for subscribers. He's an expert in identifying "alpha" potential in a wide variety of industries, but especially the small-cap sector, where he's discovered a pattern of profits that's almost foolproof.