Let The Charts Do The Talking

We are provided constant reminders that important company information is reflected in the absolute and relative performance of the company’s stock price. That may go against common sense in a few instances, especially when it comes to earnings. After all, the company is supposed to be delivering fresh new information for the stock market to digest. How could it already be priced in? Well, let’s simply call it Wall Street intuition. Of course, it’s much more than intuition. Wall Street firms have the ability to discuss key company metrics with management all the way through the end of the company’s fiscal quarter end. It doesn’t mean that company management is telling the absolute truth at all times. Occasionally, humans will “spin” information a bit, and we’ll see big market surprises when earnings are released. But at least in theory, Wall Street should already have a decent idea of what’s going to be announced when quarterly results are revealed. That’s why we organize companies with upcoming earnings reports into ChartLists that we share with our EarningsBeats.com community members. We streamline the process to help folks prepare for major upcoming earnings news.

Last week, we saw several more reminders why evaluating relative strength is so important leading up to earnings announcements. The best way to make better earnings-related decisions with stocks that you own is to constantly practice and review tendencies based on what the charts are saying. If a company is showing excellent relative strength vs. its industry peers and/or the benchmark S&P 500, there’s a decent chance that Wall Street is showing its confidence in the company before the actual earnings are released. If that’s the case, we should expect excellent results.

Let’s look at a few examples. First, let’s check out two companies that delivered excellent results last week:

Remitly Global (RELY)

One week ago, I wrote an article right here in my Trading Places blog, “This Industry Group Loves The Next 3 Months”, which focused on the specialty finance group ($DJUSSP). Remitly Global (RELY) is a specialty finance company that was trending higher relative to its peers and the S&P 500. When earnings were released, we found out why. RELY posted revenues and earnings per share (EPS) that both easily surpassed consensus estimates. Specialty finance had bottomed vs. the S&P 500 back in October, was trending higher, and moving into a strong seasonal period. RELY was showing leadership throughout this period. The chart was telling us to expect strong results:

The hard part about earnings reactions is that the market reaction doesn’t always equate to the actual report. In other words, it’s quite possible that a company reports stellar quarter results, raises guidance, and still drops. Personally, I view those types of short-term drops as trading opportunities.

Transmedics Group, Inc. (TMDX)

Talk about leadership! TMDX has been crushing its medical supplies peers ($DJUSMS), which is awesome considering that the DJUSMS has been solid relative to the S&P 500. This is the epitome of a leading stock in a leading industry group. Take one look at this chart heading into its earnings report – it should speak volumes:

Once again, TMDX is a company that delivered quarterly results way ahead of consensus estimates. Actual revenues came in roughly 30% above estimates. Few companies beat revenue estimates by such a wide margin. As a former practicing CPA that has actually performed company valuations, I can tell you that rapidly-accelerating revenues and earnings have the biggest impact on valuations, much more so than interest rates or other outside influences. Look for future quarterly estimates to be raised on TMDX and further stock appreciation.

Not everything is rosy heading into an earnings report, though. We do see plenty of instances where Wall Street shows its disdain for a company. Here are two companies that reported earnings last week and certainly fit the bill:

Unity Software, Inc. (U)

Software stocks ($DJUSSW) had been rallying hard in 2023, lifting most stocks in this space. Count Unity Software (U) as one of those. U showed no leadership whatsoever, mind you, but it still rallied simply because of the rising software tide. This is a great case of a rising absolute price, but a falling relative price. Check this out:

The equal highs on U in early December and mid-February (red arrows) are quite telling. In the bottom panel, you can see that the relative strength of software is accelerating. So while the move higher in U shares during January and February might have felt really bullish, its relative strength vs. its peers was deteriorating even further. Therefore, we shouldn’t have been surprised to see mixed earnings results. Quarterly revenues did beat expectations, but EPS came in flat, while Wall Street was expecting a small profit. It’s difficult to say which way U goes from here, because it is already beaten down, but a test of that early January low should not be ruled out.

Vicor Corp (VICR)

Ugly. That’s the best word I can come up with after looking at this chart. You have to realize that Vicor Corp’s (VICR) industry group is electrical components & equipment ($DJUSEC), which has been one of the best industry groups relative to the S&P 500 over the past year. So VICR resides in one of the sweet spots of the stock market. And still it’s produced little that Wall Street likes. Relative strength appeared to be on the mend during the January market rally. However, February happened and VICR’s relative improvement vanished right up to its quarterly report on Thursday afternoon. EPS came in 21% shy of estimates and Wall Street was not in a forgiving mood:

Sometimes, it’s difficult to think bad thoughts about the stocks we own, but we do need to try to remain objective. Holding a stock into its earnings report and “hoping” that Wall Street got it wrong is probably not going to work out long-term – or even short-term, for that matter.

Listen to what the charts are saying.

Tomorrow morning, I’ll be providing the one stock that I would not hold into its earnings next week simply to minimize risk. If you’d like to receive it, you can CLICK HERE and provide your name and email address to subscribe to our free EB Digest. There’s no credit card required and you may unsubscribe at any time.

Happy trading!

Tom