Key Insights
 

• Earnings arbitrage is a profitable investment strategy involving corporate earnings

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What is Earnings Arbitrage

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Earnings Arbitrage is a unique investment strategy profiting from the relatively large swings in share prices before and after the release of a public corporation’s quarter earnings report.

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Companies that are publicly traded, including Apple, Inc. and Amazon, Inc., release earnings reports four times each year. These earnings reports are filings that report on recent financial performance, including metrics as net income, earnings per share, earnings from continuing operations, and net sales, and may result in great shifts in the valuation of a company. The earnings report provides an update to a company’s income statement, balance sheet, and cash flow statement, and is in line with the SEC’s required Form 10-Q and 10-K filings. Particular earnings reports feature analysis from the CEO or other company spokesperson, and provide guidance into the next quarter.

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As these metrics are valuable information regarding a company’s financial health and profitability, a company’s ability to beat earnings estimates projected by analysts or by the firm can be more important than its ability to grow earnings over the prior year or quarter.

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Various financial firms keep analysts who use forecasting models, guidance, and other fundamental analysis techniques to estimate a company’s earnings per share. Companies continuing to beat earnings estimates quarter after quarter are regarded as companies in better financial health and potential for profitability.