Pizza news highlights ways to make dough

Earnings news from two pizza chains vividly shows how to consistently make money in the stock market.

Papa John's International Inc. PZZA reported earnings and shares spiked about 20%. Domino's Pizza Inc. DPZ reported earnings and shares promptly fell about 9%.

Metrics

The two companies are similar. Both companies trade at a PE of about 21. Sales of both companies are growing at about 6.1%. Domino's net margin is 5.4% compared to 5% of Papa John's. Revenue of Domino's is $384.6 million compared to Papa John's $331.3 million.

Earnings

Papa John's reported earnings of 69 cents a share compared to consensus of 55 cents. Domino's adjusted earnings were 47 cents a share compared to consensus of 49 cents.

Strategies that lost money

Trend following technical strategies lost money.

Momentum strategies lost money.

Strategies that linearly extrapolate EPS growth lost money.

Strategies that made money

Strategies based on using sentiment as a contrary indicator made money. Going into earnings, the sentiment on Domino's was extremely positive. As a contrary indicator this was flashing a red signal.

On the other hand, going into the earnings sentiment was negative on Papa John's. This is the reason for an oversize reaction on the upside to the earnings surprise.

The old-fashioned tape reading strategies were successful. Of course, the tape reading strategies of yesterday have now been replaced by computer algorithms.

At The Arora Report we slice and dice every tick to figure out what smart money is doing. Smart money in our parlance means actions of ultra-sophisticated investors who know more, who know early, and who analyze better. Our smart money flow indicator was showing consistent selling buy the smart money going into earnings. In contrast, Papa John's saw consistent buying by the smart money over the last week.

Back testing

I like pizza, but that is not the reason I chose to write this article. The point of writing this article is to help investors consistently make money in the stock market especially around earnings.

Since Domino's and Papa John's are very similar companies and they reported on two consecutive days, the reaction of these two stocks to earnings simply forms a good illustration to show case the point.

At The Arora Report, we have extensively tested various strategies to make money from earnings events. The results of extensive back testing are consistent with what has been described above for these two pizza companies.

The most successful strategy is using smart money flow or equivalent analysis of volume data. The second most successful strategy is to take positions contrary to the prevailing sentiment provided the sentiment is near extreme levels for that particular stock.

The worst strategies are momentum-based technical analysis strategies. The second worse performing group of strategies is the one that linearly extrapolate past EPS into the future.

By simply judiciously picking the right strategies going into earnings, investors can make a big difference in their performance.