Why Blindly Buying on Earnings is Too Risky

  – From James Taulman’s – Morning Market Update

I most recently added TREX to the Technical SetUps WatchList on 2/16 as shares were building a base at new highs.

As noted in this past Friday’s Morning report “The stock may trigger a BUY signal by default if its shares trade above the TRIGGER PRICE with the required volume, while keeping in mind that pre-earnings/earnings breakouts can be more rewarding, however they do carry more risk. So, caution is advised.”

This happened on Tuesday as shares opened with a sharp gap up.

As noted at 10:35 AM that day – “At this point, the stock’s volume IS confirming a BUY signal by default. However, this is an earnings breakout, and those carry more risk. Plus, this stock is already trading above its MAX BUY PRICE. This stock is NOT prudently buyable here.”

TREXChart courtesy of stockcharts.com – Click chart to enlarge.

The stock went on to close the breakout day well off of the session highs and actually back below the TRIGGER PRICE.

Yesterday TREX plunged -7.5% with a sharp increase in volume of +322% above the normal rate. This is the latest example of why you can not just blindly buy pre-earnings/earnings breakouts.

Shares closed just above the previous lows or the lows of the latest base.

I have decided to keep this selection on its watch list based on that along with the fact that the company did report decent numbers for the Q1. Earnings increased +85% over the same quarter a year ago, and sales although did not increase as significantly, were still up +7%. Annual earnings estimates for this year at +10%, with a +13% increase expected for 2018.

We will see if the stock can again break out and give us an entry.

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