Earnings Train Wreck | Podcast Episode #113

0:00
Hey, everybody. This is Ryan Mallory with Swing Trading the Stock Market, and I have a good email from one of the listeners today. I’m excited to get into that. First off, for a little bit of house cleaning here, the bourbon of choice tonight is Hayes Parker Reserve.

0:15
Never had it before. It is a small batch of bourbon whiskey. It’s got 45% alcohol, so that’s like what, 90% proof. And yeah, I’ve never had this before. The dude on the cover, I guess that’s probably Hayes Parker. Anyways, he’s got a pretty impressive mustache there.

0:31
I, I wish I had the, uh, cojones to wear a mustache like that. You know, where it comes out real pointy at the ends. That’s what he’s got going on there. It’s pretty impressive. Anyways, to anyone out there listening that has that kind of a mustache, props to you, man. That’s awesome. I can’t pull it off. Anyways, I’m gonna give this sucker a shot, let you guys know how I, how I feel about it.

0:51
Man, that taste has a lot of bite to it, man. It hit me as soon as I took a sip. Maybe I took too big of a sip. I don’t know. No, it’s, it’s a little different. Not sure I’m overly crazy about. This particular one, but I mean, I, most of the time I, I, I like them. I’m not sure I like this. It’s not as bad as the peanut butter screwball stuff that I had a few weeks ago.

1:09
That was absolutely awful. And some of you guys wrote me and told me, hey, you didn’t do it right, you didn’t put it on like ice beforehand. Some people like to mix it with stuff. Guys, I, I, I really don’t like outside of old fashion or Manhattan, I’m not really too crazy about mixing my bourbon with anything.

1:25
Uh, I like the old fashioned. I love those old fashion, but this, uh, this Hayes Parker reserve, I think that’s a hard pass for me, man. I think I’ll probably, uh, not, not drink that one again or ever get a bottle of it, but nonetheless, it was interesting. At least I can say I’ve had it before.

1:40
Well, I told you already that I had a pretty interesting podcast here. I think And this day and time with so many new investors, even though I’ve probably done podcasts in the past where I’ve talked about this, it’s good to bump this back up to the top of the, of the listening queue right now because Traders love to play the earnings, but it’s also the biggest pitfall when it comes to trading.

2:03
So this guy here, I’m not gonna tell you his name except for the fact that, uh, his fake name is Jethro. He gets the fake name Jethro from me because I try to find the most hideous names to assign people. For one, it kind of makes me smile the whole time while I’m doing the podcast, calling somebody a funny name.

2:19
Now, let me tell you, if You’re listening, you got the name Jethro, my apologies. It’s not that bad, but it’s kind of funny though. It’s not a name that you usually use anymore, but no offense to the people named Jethroe out there. Any case, Jeff Rowe, he writes me and says, hey, Ryan, fan of the pod, thanks for the great content.

2:36
Thank you, man. I appreciate that. I, I enjoy bringing, bringing it to the masses every week, twice a week, twice a week. Sometimes I think doing it 3 times a week, but I think you guys might get tired of me, honestly. I mean, I get tired of listening to myself for 3 times. That’s why I can’t do these podcasts for like 23 hours, like some of these people out there do.

2:54
I’m gonna get tired of talking and you’re gonna get tired of listening. So I try to keep it bite size so that if you have that like 1520, 30 minute commute to and from work, this is like the perfect podcast for that, right? Jethro writes, I have a question for you multiple times. Multiple times I have been burned on holding my shares through an earnings call only to have the stock plummet 15 to 20% after the call is completed, even when all of the news is good.

3:20
And man, let me tell you, he put that in caps, even when all the news is good, with an exclamation mark. So you know, there’s a little frustration in this guy’s tone here. What the heck is going on? Specifically, I just got burned today on RKT. So if you don’t know what RKT is, it’s a recent stock.

3:36
You just said it’s IPO or Rocket Companies Inc. I’ve never traded it before. I mean, it’s only been trading for like a little over a month now. That’s a hard pass for me simply because I need a little bit more candle action on the charts to really know what’s going on there. Otherwise, I, I really don’t know where support and resistance is because there’s no candles to tell me where the support and resistance is.

3:55
That’s why you never see me trade IPOs. And IPOs are notoriously ridiculously volatile. So Moving on, though, he said specifically, I just got burned on RKT. I bought in around $20 and luckily, following your strategy, I sold off a bit over half of my position along the way, all the way up to around $32 a share, which is where the stock sat going into earnings call.

4:15
Granted, this is a big jump from the starting IPO price of $18. The company reported a whopping 437% increase in revenue year over year and significant growth in their share of the market. Yet, and he says, yet here we sit the day after the call and the stock is down nearly 20%.

4:36
I’ve been, I’ve been there, I mean, I know, I know what this guy’s feeling. Yes, there was a time where I did trade earnings. We’ll, we’ll talk about that in just a second, and I got some hellish stories to tell you. So the stock’s down nearly 20%. He says, what the hell is happening? Why does the market respond to overwhelming.

4:53
Good news with a 20% drop! Exclamation mark. This is certainly not the only instance I’ve gone through with this. Just had the same situation with ZIXI, an email encryption company. ZIXI is pretty, pretty sure I’ve never traded this one.

5:09
Zix Corporation? No, never traded it before. It’s a $5.62 dollars stock. I don’t even think it’s, when was the last time I was over 10? It was like 2019, so. Yeah, I’m pretty sure I’ve never traded this one before. It’s got good volume to it, but never traded it. But that is slowly coming back.

5:25
OK, so it sounds like he’s a bag holder on that one. I’m sure this will be the case with RKT as well, but I just don’t understand the reason for the drop in the first place. Thank you so much for your time and look forward to hearing your thoughts. Thanks again, Jethro. Well, Jethro, your experience of trading earnings is no different than a lot of people’s, and it’s very frustrating, man.

5:44
I get that because if A company reports good earnings, Dad, we want a good reaction. And if that was the case, I would hold Apple through every single earnings report. But you have a lot of things that are going on with an earnings report, right? I gotta tell you though, first off, the Hayes Parker, it gets a little bit better with more dilution.

6:01
I don’t know why, but man, when I was drinking that thing, when I had just poured it, about knocked me 10 ft out of my seat. It was strong, but now it’s getting a little bit more diluted, a little bit more water’s pouring into it. Again, I think the mark of a really, really good bourbon is when you don’t even have to use ice. This one, I’m definitely using some ice.

6:17
Now the one I did last week, uh, the two stars, that was pretty good. I like 2 stars. I’d buy another bottle of 2 stars again. I thought that was pretty good. But in any case, without getting too sidetracked on the bourbon. He’s got a lot going on here and we’re going to break down this email. Piece by piece here. First of all, he’s playing earnings.

6:32
Now, if you’ve been following me for any amount of time, let’s say like 6 months or longer, you’ve probably heard me say on a number of occasions, don’t play the earnings. Just don’t play them. And why is it because you get into the situation that Jethro is talking about here. Jethro’s frustrated because why?

6:49
he predicts the earnings correctly. He says they’re gonna have a good earnings report, but then all of a sudden, even with that good earnings report, the stock just completely falls all over itself and it’s like, what gives? Why is this happening? And I used to trade earnings back in the day. I would say maybe like 1415 years ago, I would, I would do some earnings.

7:07
I don’t do earnings anymore unless it’s like a long term position. But then I’m probably not even paying that much attention to my earnings reports if this is a stock that I’m gonna be holding for the next 20-30 years. Um, but in any case, though, when you’re trading it and you’re holding it through earnings, it’s totally different story, very high risk.

7:23
And so here Jethro is just getting pounded on by some of these stocks that he actually predicts the earnings correctly, but the response is wrong. And so you have a lot of things that goes into our earnings report that you have to get right in order for your thesis to play out correctly. For one, you get these things called analysts, right?

7:39
And I know you guys have all heard of them, but they’re not very good at their job, for the most part. There’s some good analysts out there. I’d say most of them are, aren’t right most of the time. And so you have this earnings reaction based off of what the analysts think is going to happen. There’s this expectation for what The earnings is going to be, what the guidance is going to be, what the revenue is going to be, and any other kind of like company specific news that’s coming out.

8:02
Maybe it’s they’re expecting another iPhone model or maybe it’s they’re expecting a new product line for a company ABC or a company XYZ. And when those things don’t happen, it causes a sell-off. So based off of what the analysts think, it needs to beat what the analysts expectations are for earnings, for revenue, and for forward guidance.

8:22
And if any one of those 3 goes wrong or misses, there’s a good chance that you’re gonna see a sell-off. Now that doesn’t mean you go short every stock in earnings because that’s a bad play too. But those three things, anything can go wrong on those 3, and if they do, there’s, there’s a strong possibility it’s going to sell off.

8:38
So even if you think that you know better than the analysts, and you got to remember, like a company like Goldman Sachs, if they’re following Apple, they’ve got a whole team of people probably following the Apple stock. They’re talking to people in the company. They have more resources on the ground to figure out Apple’s earnings than either you or I because we’re just a one-man team.

8:57
Maybe we should start like a SharePlanner or Mafia, right? where we become like our own like retail analysts, man, and the analysts come up with their expectations for the stocks, right? Not, not Goldman Sachs and not JP Morgan. That’s actually a good idea. I just don’t know how the hell you would coordinate something like that, or if it’s even feasible.

9:15
It probably is feasible, but outside of my area of expertise, any case. So we got that we got all that, OK, the analyst expectations. But then you also have the price action going into the stocks. So going into a a company’s earnings, you can have these huge massive runs and The stock.

9:30
So you can have a stock, let’s say it’s Apple, and let’s say it goes from $120 up to $150.02 to 3 weeks before its next earnings report, right? And people are all excited. It’s like, man, they’re gonna have blow out numbers and everything, and they have blowout numbers. They exceed the EO expectations on earnings, on guidance, and on revenue.

9:50
They come out with a surprise new model that there’s a huge demand for, everybody’s liking it. Most cases, it’ll probably go up if they do that. But sometimes when you have this huge run up prior to earnings, You have a situation where the outcome of the earnings is so obvious and that so many people know that it’s going to happen, that it’s actually baked in already to the share price so that when they actually do announce it either it doesn’t do anything or it pulls back some.

10:12
I think you saw that recently here with Amazon and Tesla with their stock splits, you had this huge run up into the stock split and then this past week, the stocks all pulled back after the stock split. Yes, you had like a one or a two-day rally in the stocks right after the, the stock split, but then you saw a significant pullback.

10:29
Everybody’s like, oh man, I thought this thing was going back to $2000. I thought Apple was going back up to $500 a share, and they were wrong because oftentimes the expectations of that kind of a move is already baked into the stock price, so it’s not going to move after the news. That’s where the old saying comes from, buy the rumor, sell the news, you buy the rumor of it doing good and then you sell the news.

10:49
And so you still have it. It’s very, very much in play still to this day, and it’s been in play for as long as I remember. But yeah, RKT, you have a lot going on there. First of all, you’re playing an IPO. I wouldn’t even touch IPOs. I know there’s a lot of volatility in that. I remember when Facebook came out as an IPO, there was a ton of volatility in Facebook, a ton of it.

11:08
I think it went all the way down into the teens, uh, not, not too soon after its, uh, first day of trading. There’s just not a lot of price history, so you don’t really know how to manage the risk from a technical analysis standpoint. And so if you can’t manage the risk, it’s really not something that you want to be in because where there’s a lack of price history, there’s a lack of ability to be able to manage the risk.

11:28
So I don’t ever get into these IPOs. I’m not even interested in it, quite honestly. It’s not that I don’t follow the charts or anything like that. I just don’t see there being a play in something that’s only been trading for like a couple of days or a couple of weeks. So I need price history there. So I think that’s one thing that Jethro has working against him.

11:45
Not only is he playing earnings, but he’s also playing earnings on a stock that there’s a lot of hype around. There’s a big, it was a big IPO with rocket loans. And so it’s very easy for the reaction not to work. I mean, this thing hit almost 3450 and went down as low as 2250. So 30% dropout in the stock itself, and then it’s closed at 2457.

12:05
That’s a lot of volatility. And again, I don’t know where you even put stock losses on these things going into earnings or just trading in general because there’s no price history. And so what you probably saw there is with that 437% increase in revenue year over year and significant growth in their share of the market, that’s probably why. was so hyped up of a stock because people already knew that that kind of stuff was already unfolding.

12:25
So that 20% drop, it probably isn’t all that big of a surprise. Now, I will give Jethro some credit, is that he took some of his risk off the table by reducing the position size of his overall trade going into earnings so that the risk wasn’t as bad. Kudos to Jethro for doing that because he started realizing, hey, if this thing goes against me, I want to make sure that I have some of my profits that I’m walking away with.

12:45
And so that helps to curb some of the losses that he took on That 20% drop. And yes, it’s not just rocket companies that does this, RKT. You also have other companies all the time that did it. About 1520 years ago, I would, I would play the earnings and I would get wrecked on them.

13:01
I remember one SMSI, Smith Micro. It’s crazy that they’re still around. They’re like a $3.70 stock. When I was trading them, they were like a $30 or $40 stock, and, uh, earnings killed me, killed me all the time, man, it was brutal. And I think I held, held it three different times.

13:16
Through earnings on 3 different trades, and each time I got destroyed. And that was part of the process of me learning like, look, there’s no real edge in trading the earnings. You can’t really predict with any certainty or degree of confidence how a stock is going to respond to its earnings.

13:31
Now, some companies have a positive response more times than they don’t have a positive response, but that’s only good until the fact that they don’t respond positive to a earnings report. So that’s not really something that you can really play very well. Now I talked about And ZIXI and how he took a big hit on that one and that it started to come back and he’s sure that this will be the case with RKT, but I don’t like that idea either.

13:52
It’s like, oh, it’ll come back. I’ll just wait for it to come back. No, because there’s a lot of stocks that don’t ultimately come back, and I’m not saying that’s going to be the case with RKT, but you have to plan accordingly because there are stocks, and if we’re at a market top, then RKT is probably gonna get nailed by the overall market if it decides to start pulling back even further than what we saw last week.

14:12
And by the way, too, do me a huge favor, and some of you guys have been doing that and I really appreciate it. If you’re listening on like the Apple iTunes podcast or whatever platform that you’re listening to, make sure that, you know, if there’s an option to follow or to subscribe, that you do that, and to also make sure that you leave a review.

14:28
I, I really appreciate the reviews. It means a lot. It keeps me, uh, encouraged and keeps me going. So your reviews are very meaningful. I’m also flirting with the idea right now too, of taking the podcast above and be. On and making it to where you don’t have to just wait for the next episode to hear what I have to say, that you can get my watchlist, you can get my market analysis, and that you can get updates on all the fang stocks and Microsoft and Tesla each week, multiple times a week.

14:53
And so I’m thinking about setting up a system there. Yes, it’ll it’ll have a little bit of a price because, you know, we gotta, we gotta pay the bills, right? But anyways, but it’ll just be above and beyond. It’s not gonna take away from the podcast that I’ll keep doing the podcast like I always do. But it’ll make it to where if you want some more action, if you want a little bit more analysis from it, you’ll have that option.

15:13
And then it helps to support the podcast’s growth and outreach as well, and which is something I’m very appreciative for because I love doing this. I think it’s been like 4 days since I did the last podcast, and I kind of missed it, so I’ve been really looking forward to doing this episode tonight. But any case, you know, to wrap up what Jethro did here, some things he did right, some things he did wrong, and that’s OK.

15:31
We’re traders, we’re all learning. I’m learning every day. Well, but what Jethroe did right is that he took some profits off of the table. He reduced his risk into a very high risk situation because he’s dealing with not only an earnings report, he’s dealing with this company’s first earnings report since the IPO.

15:47
So that’s a big deal. Nobody really knows how this thing reacts to earnings traditionally. Yes, some companies do not have as big of reactions to earnings as other companies. And so we saw what kind of earnings reaction this thing can have going forward, and that’s a big deal, but he Into a blind, he didn’t even know, but at least he took some of the profits off the table.

16:05
But on the other hand, he got himself into a very high risk situation with RKT playing a stock that had very little price history and then playing the earnings of it as well. And I’d also say to him as well, don’t just always assume that a stock is going to make a comeback, because sometimes they don’t.

16:20
And I, I’m not saying that RKT won’t. I’m just trying to say that sometimes it’s timeline for coming back is more than what you or I can handle. So with that said, I hope you guys enjoyed this podcast. Um, if you have any questions, please send them my way. I love getting your questions because I’m making them into podcasts.

16:38
It’s really, really educational and helpful for the people who listen to this podcast, and so you’d be surprised. So a lot of people have the same questions that you’re having, so by you sending in your questions, there’s a very good chance I’m gonna. Put it on there because I like answering these questions and I know that a lot of you guys out there like hearing it and I think this was a very, very good email because this is something that a lot of new traders are doing and they’re doing it blindly, not realizing, and I don’t know if Jeth was a new trader, but I’m just saying a lot of new traders are going in and holding through earnings, and they don’t realize the risks that are involved with the earnings.

17:10
So thank you guys. I appreciate you listening. God bless.