August remains as choppy as we warned it would be…
Weeks ago, we discussed how August kicks off a gauntlet of weak seasonal trends.
That’s certainly been the case lately… as plenty of stocks are suffering under the surface of an S&P 500 that’s slightly up on the month.
And a lot of this suffering is coming on the other side of company earnings reports.
FactSet recently highlighted how harshly investors are penalizing earnings misses in 2025. Below, you can see that negative EPS surprises for the S&P 500 have seen stocks sell off 5.6% on average vs. a 5-year average decline of 2.4%:
Source: FactSet
Examples include dental retainer company Align Technology (ALGN). Shares crashed by 26% after missing earnings on July 30…
Semiconductor firm Super Micro Computer (SMCI) fell more than 18% after its earnings and revenue miss…
And weight-loss drugmaker Novo Nordisk (NVO) fell more than 4% after a revenue miss despite beating on earnings.
You need to be choosy with stocks in low-volatility environments like this… especially with investors so quick to slam the sell button on a bad earnings report.
Right now, the investing masses only want to hear two words on an earnings call…
When these two words pop up, you can be confident in strong price gains to follow.
Today, we’ll look at two stocks standing out in this special way… and show you why they’re the ones to own right now.
The Two Words Everyone Wants to Hear
Everyone wants in on the next big winning company early.
Think about when Apple (AAPL) unleashed the iPhone in 2007…
Since then, AAPL has returned 56.2% a year on average. Some of the biggest annual gains were early on in 2007 (133.5%), 2009 (146.9%), and 2010 (53.1%).
A lot of this had to do with Apple’s earnings. I remember vividly how Apple would constantly surprise to the upside as demand for their smartphones exploded.
But just as important as beating expectations is raising them. The golden combination is a company that not only does better than analysts expect for the current report… but also says it will do better than analysts expect in the future.
Companies with a habitual “beat and raise” are rare… and often have a winning product or service the masses love.
FactSet put together the number of companies (by sector) that offered positive and negative FY EPS guidance from the S&P 500 this year.
Notably, Information Technology has 24 positive vs. eight negative.
Other areas beaming with green are Health Care with 32 positive and 17 negative guides and Industrials with 31 positive and 18 negative guides.
This is proof that even today there are trends to follow:
Source: FactSet
Now that we’re armed with data, let’s dive into two recent earnings reports that stunned Wall Street.
More important, I’ll offer one Tech and one Industrial name that history suggests is ready for more gains.
A Beat and Raise to Buy on Sale
Technology has been hot.
Since the April 8 low, the S&P 500 Technology sector has rallied a stunning 52%. That’s by far the best-performing sector.
But inside of the group, some names aren’t keeping stride.
Software provider ServiceNow (NOW), which offers workflow automation and cloud services to enterprise clients, has been stuck in a downtrend recently.
Shares have fallen 15% over the past two months:
And this comes after the company beat Q2 earnings and offered a strong FY guide.
For Q3, NOW expects revenues of $3.3 billion at the midpoint vs. estimates of $3.2B.
The company also raised FY subscription revenues to $12.8B at the midpoint vs. $12.7B estimates.
Keep in mind, this is a powerful stock historically, as it’s climbed 1,021% over the last decade compared to 264% for the S&P 500.
So when a market-leading stock takes a dip, we investigate.
Turns out that NOW has fallen 15% over the past two months. A fall of 15% or more over 42 trading days has occurred 230 times in history.
Here’s why it’s a good bet.
A month after this fall, shares average an 8.8% gain 70% of the time.
Two months later, shares average 14.6% gains 83% of the time.
The evidence suggests the time to leg into ServiceNow is… NOW:
Bet on winning stocks when they pull back.
It’s that simple.
Now let’s perform a similar analysis on another earnings winner.
An Earnings Beat Rally You Shouldn’t Fade
A month ago, I told you about a smart rotation play into homebuilding stocks.
Companies like D.R. Horton (DHI) and PulteGroup (PHM) have seen strong returns since their earnings reports recently.
But it’s not just the heavyweights that are blasting off.
Smaller names are, too, including Installed Building Products (IBP) which helps homebuilders install insulation.
This company shattered earnings on August 7.
Q2 earnings came in at $2.95 per share, nearly 20% higher than Wall Street estimates of $2.40.
Revenues hit $760.3 million, way north of the $711.4 million estimates.
When you beat by this magnitude, shares have nowhere to go but up.
Post earnings, the stock rallied more than 20% in the session.
Now it’s up a whopping 54.9% in two months:
Now, who wants to hop onto a stock that’s jumped this high this fast? Probably not many.
But here’s why that could be a mistake.
IBP gained 54.9% over 42 trading sessions.
Since 2014, there’ve been 37 instances where the stock jumped 54.9% or more in this span of time.
One month later, the stock averages 7.1% gains with a 76% win rate.
Two months later, shares rally an average of 24.6% with a 97% win rate.
According to these numbers, you don’t want to jump off the bull just yet.
Earnings season is full of great opportunities when you are armed with data. Focus on beats… that’s telling you that business is good!
Regards,
Lucas Downey
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Source: TradeSmith