Trading Biotech Stocks Around Earnings

by | May 28, 2019

Stocks are trying to keep their momentum from Friday going, as they look to close in the green for a second straight session. However, like Friday, it appears it will be another low volume day.

Which is okay by me. As I’ve been away from the screens… vacationing.

(follow my adventure on Instagram)

And boy was it fun… having a chance to visit Disney and Mexico…

(Mexico was a blast… trading has given me the freedom to travel at the drop of a hat… if you’re looking for ways to level up your trading… check out my Sniper Report.)

So what do I do on these slow moving days?

First, you’ve got to remain patient. The reason I trade is to make money not because I’m bored or am looking for thrills.

One thing I like to do is look at stock charts and put together watchlists.

It’s also a good time to learn new skills and develop strategies that have the potential to make you money in the future.

For example, one catalyst trade I haven’t mastered yet is the earnings trade. And now that earnings are slowing down, it’s a good time to reflect and learn before they start back up in July.

Read on to brush up on your earnings knowledge… and how I approach biotechs around and after an earnings catalyst.


How to Trade Around Biotechs Earnings Announcements


Earnings season is one of the busiest times for trading… and it happens 4 times a year… and typically, there’s a lot of volatility in stocks reporting earnings. Now, that’s good news for us because it uncovers a lot of trading opportunities.

However, when companies report earnings you need to know what to look for depending on which stocks you’re trading.

Generally, companies report revenues and earnings… and they’re compared to either previous earnings or analyst estimates, as well as guidance and other key pieces of information.

Now, depending on the sector and market capitalization… traders will focus on different metrics.

That said, let’s take a look at some of the key metrics to focus on when you’re looking to trade biotech earnings stocks… but first, we have to explain how earnings reports work.


Earnings Season Explained


Keep in mind, I rarely buy stock or options and hold them into earnings… if I do, that means I really like the other factors I’m looking at, such as the chart pattern or overall changes in the company.

Now, earnings season happens a few weeks after each quarter end. You’ll see thousands of stocks reporting earnings in January – February, April – May, July – August, and October – November.

That said, we’re just winding down from our second earnings season of the year… and I’ve been getting questions about how to analyze earnings reports… and what to look for in small cap biotech stocks when they report earnings.


What to Focus on in Earnings Reports


For the most part, mid- and large-cap stocks focus on the headline number… you’ll see something like Apple Inc (AAPL) reported March quarter earnings – beating analysts expectations… AAPL’s guidance for the quarter was higher than analysts expected

With mega-cap companies like AAPL, they get so much analyst coverage… so traders have an idea of what the market is looking for.

Now, if a company reports guidance… that’s great… because the market is forward-looking… and guidance gives us an idea of where the company is headed.

When you look at what AAPL did in relation to what Wall Street expected, you could probably guess the stock went higher:

  • “EPS: $2.46 vs. $2.36 forecast by Refinitiv consensus estimates
  • Revenue: $58.02 billion vs. $57.37 billion forecast by Refinitiv consensus estimates
  • Q2 iPhone revenue: $31.05 billion vs. $31.10 billion expected forecast by FactSet consensus estimates
  • Q2 services revenue: $11.45 billion vs. $11.37 billion forecast by FactSet consensus estimates
  • Projected Q3 revenue: $52.5 to $54.5 billion vs. $51.94 billion forecast by Refinitiv consensus estimates”

For example, traders can compare the earnings per share (EPS) – the portion of a company’s profit allocated to each outstanding share (the bottom line) to analyst expectations.

Additionally, we could compare revenues (the amount of money the company actually made before discounting any expenses) to analyst estimates.

When a company’s actual numbers are higher than analyst estimates… and report strong guidance, chances are the stock will run higher… just like AAPL did.

Here’s what AAPL did the day after it reported these numbers.



With large companies, it’s a bit easier to analyze earnings because they’re actually selling products and services… if they’re selling more iPhones and services in the previous quarter and expect to see strong demand in the next quarter… the stock would probably gap up and run higher.

Additionally, we have a guide of what to expect from analysts.

However, what happens if a company doesn’t get a lot of analyst coverage and doesn’t report earnings?

For example, I trade small-cap biotech stocks a lot… these companies typically don’t get a lot of love from Wall Street… and generally, we don’t have any numbers to compare earnings or revenues to.

That said, I don’t really focus on looking at the top and bottom line… I focus on other metrics for this sector.


What to Focus on for Small-Cap Biotech Earnings


With small-cap biotechs, people don’t really care about the EPS or revenues… because they don’t sell anything yet. These companies are usually in their early stages and focused on researching and developing (R&D) treatments.

What they look for are drug pipeline updates.

In other words, traders are looking for key data points for treatments in the clinical trial stages. This allows traders to evaluate the overall potential for growth in revenues and earnings. Now, if you need a refresher on why clinical trials are so important for biotech stocks, check out my free eBook here.

Any updates on clinical trials actually uncover opportunities for us.

For example, let’s say you like the chart on a small cap biotech stock that just reported earnings… however, the company didn’t really move on the headline numbers… and they didn’t release any key data points for treatments in its pipeline.

The only thing they let investors know was the fact it was looking to release data for one of its treatments.

Well, you might think that the information wasn’t useful.

But if you know about my catalyst runup strategy, that actually could’ve helped you lock in a winner.

For example, I was watching VtV Therapeutics (VTVT), and I let clients know about my trading plan.

VtV Therapeutics (VTVT)

Catalyst Dates: Phase 2 Type 1 diabetes data due in June

Buy Zone: $1.25 to $1.50

Stop Zone: $1.10 or below


Now, VTVT reported earnings, and reiterated it would be reporting data in June… I liked the way VTVT was bouncing off a key support level… and chances are, the stock was going to get a nice runup into the data release.

That said, you can really use any details about treatments to uncover trading opportunities.

For example, I actually traded VTVT based on this pipeline update… and even alerted clients about the trade.


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Keep in mind, I’m generally looking to hold these trades anywhere between 1-4 weeks.

Now, not too long after I bought shares of VTVT, it was running up in the after hours one day… and I actually took some profits off the table.


(If you want to receive real-time alerts like these, click here to get started)


As you can see, updates on treatment pipelines could be very lucrative. However, you should understand how biotechs trade first… if you want to cut that learning curve, click here to get started. 


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