Leo Fasciocco* Publisher of Ticker Tape Digest and President of Corona Investment Management of America Focus: All areas of trading; educates through extensive writing * Not employed by or affiliated with eSignal

I use several trading strategies covering various time frames and directions -- long and short. In this article, I will cover one that an eSignal subscriber can use. I call it: "The Big Earnings Surprise."

I am often amused when I hear TV commentators mention how a stock is up or down, and then they cite earnings that were a penny better or less than the consensus on Wall Street. To me, that is no news at all.

Instead, what I look for are companies that report earnings that are better by a significant amount from the highest estimate on The Street. I have found in my research that these stocks can often move higher in the earnings news and continue to trend higher for some time. In some cases, they can turn out to be leaders -- big winners -- in a new bull market.

Some big stock winners that reported a big earnings increase to kick off their advance were little-known J2 Global Communications Inc. (JCOM), which ran up from $3.75 in early 2002 and reached 29 by October of that year. It puts out Efaxes and provides other Internet services for communications.

Two other big winners were educational stocks. Corinthian Colleges Inc. (COCO) soared from 20 to 41 in 2002, and Apollo Group (APOL) advanced from 30 to 45.

How can eSignal subscribers get in on these earnings-driven plays to improve their portfolio performance? Well, the key is to find stocks of companies reporting much stronger than expected earnings or that are reporting forecasts of great earnings. This can be done very easily by going to eSignal's Earnings announcement calendar. It can be found under the section called Research in the eSignal program. Those stocks can be put into a file and checked for earnings during the day.

Also, one can go to CBSmarketwatch.com. This website has a feature section called "Earnings Watch." They do a good job of presenting the most important earnings forecasts of both positive and negative surprises throughout the day.

What you should be looking for are companies whose earnings surprise is significantly greater than what Wall Street analysts have been forecasting. Also, it is ideal if the earnings are higher than a year ago. A technical plus is if the stock is breaking out of a base on the news. However, this is not an essential.

Make sure, too, when you're checking for earnings surprises, that any forecast made of future periods are also favorable. Don't get tricked into finding a favorable earnings report only to later discover that they downgraded earnings for future quarters.

Of course, it is ideal to get into these stocks as soon as possible after the earnings report is released. But, there are a few tricks to avoiding a few of the "lemons." The stock must respond in a positive way to the earnings surprise news. If it does not, forget it. There is something wrong. On the other hand, If it moves up a few points or more, don't get scared -- get aggressive and go after it.

1. Earnings are reported and they are well above Street estimates.
2. The stock responds by moving higher, sometimes gaping ahead in price.
3. You enter with at least a 50% position and then average up quickly.
4. The stock closes the day up several points. You set a protective stop.
5. Within the next few days, analysts raise their rating and the stock rises further.
6. Stock continues in an up trend and becomes a big winner in a bull market.

There are four seasonal periods when earnings reports pour in, and many of these opportunities will present themselves. They occur in April, July, October and January. Of course, retailers, for instance, will report a month later than these four periods. That is because most retailers end their fiscal year on January 31.

Here is how you can prepare for these big earnings periods to spot these big earnings surprises. You can get a list of companies that will report earnings for the next week or two from the eSignal program's Research section.

Put these stocks into a file, making sure you put in the heading notation for news headlines. Keep close watch when these companies report their earnings; be especially watchful prior to the NYSE opening in the morning and after the close. Often times, you can get a play at the opening.

When you spot the earnings check to see if they topped the highest estimate on The Street by at least 10%. Make sure the stock is liquid. Generally, NYSE stocks often react well to big earnings surprises. Next, quickly check to see if the stock is reacting in a positive way to the news. If so, initiate a position.

Depending on the stock market's trend and other factors, one can either take a quick profit or play the earnings surprise for more. Generally, if the stock market is in an up trend, and the group the stock belongs to is doing well, the odds favor staying with the stock for a bigger gain.

One of the reasons, many of these positive earnings surprises work well is that there is something "new" that is driving their business. That something new could be a better product or service, a new invention or just plain better management of operations.

In any case, earnings are an important driver to push a stock higher. Spotting these big earnings surprise plays can put you on the track to some very good profits.