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#374 - Earnings Surprises - What Are They & 3 Examples: Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to be talking about earnings surprises, what they are and I want to share three examples with you. Now, the key thing to understand about...

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Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to be talking about earnings surprises, what they are and I want to share three examples with you. Now, the key thing to understand about earnings surprises is that they can happen in either direction and it doesn't necessarily always have to be this difference between what analysts or Wall Street expects the company to make and what they actually make. In fact, a lot of earnings surprises can come as a result of guidance that the company has or based on the underlying expectation of actual market participants. What do I mean by saying all this? Well, when a company announces earnings, typically what will happen is you will also have some of these big companies that are followed by research analysts. And so, a research analyst might publish their expectation of where the company's revenue and earnings and growth should be for this quarter. Now, all of these research analysts pull their numbers together and basically, we get this consensus estimate. You know, what is the mass of research community, what do they think the earnings per share are going to be, the revenue growth, the top line revenue, etcetera. And so, that builds the basis for where the benchmark is for that company. But when a company surprises, they usually have a number that is significantly higher or significantly lower than what research analysts expect as a consensus. And so, that causes the stock to either jump or fall based on that differential. But what also might happen is we also might see that the stock might beat earnings estimates, meaning that the stock might actually outperform earnings estimates, but still fall because even though it outperformed what analysts thought it would do, it still wasn't enough for the actual market. That often happens as well and that can cause a lot of traders to kind of scratch their heads and wonder what is actually happening. Now, at the same time, we also can have companies that will issue different guidance after they announce earnings. Even though their earnings might have been great or better than expected, they may now issue guidance that says that they expect next quarter's earnings to be lower. And so, that revises their forward-looking projections which obviously has an impact on the stock price. When we look at three examples… I’ll just bring up three general case studies, but you can look at a lot of these examples because they happen all the time. But the ones I’m going to talk about right now are Apple, Tesla and Facebook. Tesla just recently in the last couple of quarters, went through an earnings event where the company announced earnings, the top line revenue was great and the company actually opened higher than expected. But then actually, as the company started to get into its conference call and started to provide guidance, the stock actually closed about $40 lower on the day. In this case, you had literally two earnings surprises in the same actual trading day. It was very hard to trade Tesla probably during that day. In the same vein, what we’ve seen before time and time again with Apple is we’ve seen Apple have above average earnings, above consensus or Wall Street estimates in as far as their earnings per share or revenue growth and still, the stock traded lower. In fact, this has happened at least six times before in the past where Apple has outperformed the market as far as expectations, but has actually traded lower. And so, the reason is because it’s still not at the same growth rate or it's still not at a growth rate that people truly expect Apple to be hitting at. Apple may have outperformed what analysts expected, but it's still not outperforming what actual investors have expected. In the last vein or I guess the last example here with Facebook, what we’ve seen recently with Facebook is Facebook has done the same thing with Apple, except it's gone about it just a little bit diff

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