A Simple Way to Maximize Profits This Earnings Season

Nothing moves stocks like earnings. You can easily see stocks soar or crash by double digit percentages in the blink of an eye. There’s nothing quite like it.

And since Alcoa (AA) just kicked off the 2012 earnings season, now’s a great time to get positioned to profit. There are weeks of earnings announcements ahead, so you don’t want to miss out on the action.

If you’ve been burned during earnings season in the past, I’ve got a great way you can reduce your downside risk using a very simple method…

Before I get into it, let’s look at the most often used method of playing earnings.

Probably the most common method investors use to play earnings is to buy a stock just before the company announces their latest quarterly numbers. The idea is that if a company beats earnings expectations, they’re in position to strike it rich.

Now sometimes a company beats its earnings forecast, but they lower forward revenue or earnings guidance. And that can be a disaster for the stock. You’ll get the outcome you were looking for (the earnings beat), but lose money on your trade.

On the other hand, a company can see its stock rise even if they miss the current earnings forecast. In this case, investors may look past the miss and focus solely on the forward projections. You never really know.

Here’s how you can reduce your risk and cash outlay during earnings season trading.

First, watch the earnings of big-cap industry leading stocks and then buy stocks in the same industry after the industry leader announces. If you see an earnings beat and great forecast by say, Intel (INTC)… head out and pick up shares of a few different semiconductor stocks.

You’re buying shares of companies in the same industry as INTC, but you know what Intel’s earnings were… and how they’re forecasting future results. That’s because the big-cap names serve as a gauge for the entire industry.

That’s how you reduce your risk…

Of course, there are no guarantees in investing, but it at least gives you some edge in your earnings season trades. In addition to reducing risk, I mentioned reducing your cash outlay as well.

There’s no better way than to buy penny stocks!

Penny stocks in the same industry as a big-cap bellwether will require much less capital, share for share, to trade. And you can buy two, three, or even four of these much smaller companies for the same cost as the large-cap leader.

In the case of Intel, you could buy shares of Spire (SPIR), API Technologies (ATNY), and Silicon Image (SIMG)… all of which trade under $5 a share.

To recap…

Earnings season is a great opportunity to book double digit gains in stocks with great earnings or forecasts. And buying penny stocks in the same industry as the big cap companies is a great way to reduce your risk and cash outlay, while still positioning yourself for huge gains.

Until next time,

– Brian WalkerSource: Penny Stock Research

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