Riding sentiment: Timing

 Here is a neat study. So I was thinking about timing of trades, and I had a hypothesis: the best time to buy is just after good earnings. I call it the "No Bad News" theory: over the next three months, the largest and most recent piece of news for a company was its earnings success. Therefore, because humans are subject to recency bias, the stock should rise at a greater rate than the market.

To study this hypothesis, I looked at the first 40 companies alphabetically that beat earnings in quarter 3 2011 by at least 10%. I used this list:

http://wallstwatchdog.com/blog/commentary-analysis/companies-that-beat-earnings-expectations-in-q3-2011.html

http://wallstwatchdog.com/blog/commentary-analysis/companies-that-beat-earnings-expectations-in-q3-2011-part-2.html

  (then replace -part-2 with -part-3, -part-4, etc. to see the rest of the list)

Here are the results:

Companies that beat earnings estimates in Q3 '11 by >10%, stock prices from the close of the day after earnings announcement to present:

AEL Nov 3 $11.47 to $11.16 down 3%

UHAL Oct 28 $79.10 to $95.48 up 20%

ALVR Nov 2 $1.04 to $1.15 up 10%

ANIK Nov 3, 2011 $7.27 to $9.43 up 30%

AOL Nov 2 $15.42 to $15.60 up 1%

ARC Nov 2 $4.59 to $5.46 up 20%

AREX Nov 2 $27.51 to $34.32 up 25%

ATNI Nov 3 $41.97 to $36.49 down 15%

CACI Nov 2 $58.04 to $57.66 down 1%

CCRN Nov 2 $5.30 to $6.00 up 12%

CGX Nov 2 $50.87 to $48.06 down 5%

CLH Nov 2 $57.99 to $63.49 up 7%

CLMT Nov 2 $18.65 to $21.62 up 15%

CLWR Nov 2 $1.75 to $1.81 up 4%

CLX $63.97 to $68.63 up 7%123

CHTP Nov 2 $4.74 to $4.94 up 4%

CNL Nov 3 $36.85 to $37.12 up 1%

CNP Nov 2 $20.30 to $18.81 down 7%

COHR Nov 2 $53.86 to $57.68 up 7%

CPE Nov 3 $5.67 to $5.62 down 1%

CSII Nov 2 $8.53 to $9.65 up 14%

CSU Nov 3 $7.74 to $7.89 up 2%

CUZ Nov 3 $6.67 to $7.07 up 7%

DRC Nov 3 $51.64 to $53.29 up 3%

ECTY Nov 2 $1.87 to $1.14 down 40%

EDGW Nov 2 $2.89 to $3.26 up 15%

EIG Nov 2 $17.43 to $18.57 up 7%

ELLI Nov 2 $5.46 to $5.63 up 3%

EXTR Nov 2 $3.10 to $3.08 down 1%

FARO Nov 2 $44.63 to $53.83 up 20%

FCN Nov 2 $42.07 to $42.04 flat

FIO Nov 2 $35.29 to $29.29 down 18%

GAIN Nov 3 $7.48 to $7.95 up 6%

GGC Nov 2 $18.98 to $34.97 up 84%

GRMN Nov 2 $35.88 to $42.00 up 18%

GVA Nov 2 $26.56 to $27.33 up 3%

HBI Nov 2 $27.30 to $24.89 down 9%

HSNI Nov 2 $37.83 to $36.68 down 4%

HGG Nov 2 $14.08 to $11.24 down 21%

WOLF Nov 2 $2.62 to $3.18 up 22%

TOTAL

UP: 27

DOWN: 12

FLAT: 1

AVERAGE: up 6%

Meanwhile, over that same period the Dow has risen 5%, the S&P 4%, and the Nasdaq 3%.

So the results are moderately positive. More data would be helpful after the 2011 Q4 earnings sprint leading up to 2012 Q1.

I got the idea from Michael "my goodness look at those phenomenal results" Burry, who posted in his early days on Silicon Investor "sell on new lows." I thought, strange, because that concept is very anti-Buffett. I twisted it a little bit into this theory here.

The bottom line: Your short-term profitability might increase using this method. Long-term, I am not sure. That requires another study for another day.