Beginners Lessons options Stocks

PEAD: About As Close To A Free Lunch As The Market Will Give You

PEAD is post-earnings announcement drift. It’s a “phenomenon” discovered by in the 1960’s when some guys noticed that after earnings releases the stock nearly always tends to continue drifting in the direction that the earnings tilted. A stock has surprisingly good earnings and jumps on the news, it will probably keep going up for the next few weeks. Same with posting a loss, it will likely continue to drop in price not just the day after earnings, but for the next few weeks.

For example, Kraft Heinz is being slaughtered this morning. As we write, the stock is down 27.5%. Long story short, it because of a trifecta of bad news. Quarterly earnings were massively disappointing, they cut their dividend by 25% (one of the main reasons people buy huge, old companies like this is for the dividend), and they also disclosed that they are being investigated by the SEC for some possible funny business. Whether it’s true or not doesn’t matter. What matters is that the market didn’t like it. So now we have a stock down a massive amount and while this is a VERY overstated example, we can expect with nearly 100% certainty that the stock will continue to fall for a while. It will drift in the direction that it moved initially. Buying right after a huge drop like this is 100% a terrible idea. It may bounce up a bit because of the severity of today’s drop, but that’s only a band-aid on a bullet wound. It’s a pretty damn safe bet to assume you can short the stock or buy puts and probably turn a profit (assuming you don’t overpay for your option).

Conversely, you have a stock like ROKU which posted earnings and revenue higher than Wall Street expected. The stock is up over 20%, a massive over-reaction to an earnings beat. It doesn’t matter though, the street is excited. We can expect Roku to continue in the upward direction for a while. OR at the very least it will likely outperform the broad market.

So that’s all that nerdy acronym means… PEAD = if the earnings announcement was good, the stock will continue moving up for a while. If earnings sucked, it won’t just move down the day after the announcement, it will continue down for the short-term.

 

 

Further reading for the financial nerd types:

Post-Earnings Announcement Effect (Quantpedia)

Surprising Facts on Post-Earnings Announcement Drift (AlphaArchitect)
note: read anything Alpha puts out. Their work is golden.

Drift or Jump: What Drives Post-Earnings Announcement Stock Returns? (SSRN)

Post-earnings-announcement-drift and 52-week high: Evidence from Korea (ScienceDirect)