Citadel Crushes You on Earnings. Here’s Why.
Intraquarter Data & Setup Dynamics
Roblox (RBLX) had a monstrous earnings print last week, but the stock was only up +5%.
This is just one of many examples of earnings being pre-traded weeks in advance based on intraquarter data points. A few years ago, this would have been a +20% move for RBLX.
Whether you like it or not, it’s the reality you need to adapt to, whether you operate on a 12-month horizon or a multi-year one. Otherwise, you risk getting run over.
You might have heard of the unnecessarily fancy and slangy term “setup dynamics around events”. This partly refers to these incremental data points throughout the quarter and in the lead-up to earnings.
I have covered three different examples (DASH, SBUX, RBLX) on phoenixlearning.io, explaining why they were pre-traded intraquarter, two of which, SBUX and RBLX, are from their most recent earnings announcements.
Starbucks (SBUX)
On SBUX, Allen discussed long MCD / short SBUX as a potential trade while walking through his investment process. In hindsight, this was a truly great call, which would have worked well both in the short-term (1-2 months) and the long term (6+ months). Much of what he talked about has been playing out over the past few months (highly recommend watching the videos):
The key debate around SBUX and its valuation getting ahead of itself, especially given the company’s challenges around going back to its core.
The importance of being defensive, given early signs of slowing consumer spend, something he was already sensing back in early December!
We have also seen his SBUX thesis, in particular, begin to really unfold, and my intraquarter discussion builds on that.
Why is it important to understand these intraquarter dynamics?
If you are trying to break into a hedge fund:
If you have done case studies, especially the 24 or 48-hour ones, you might know that sometimes they prompt you with questions like, what are the key metrics or KPIs or datapoints we need to keep track of or we need to gain incremental conviction in your long or short thesis? Even if they don’t ask you directly, it’s important to show at least some awareness, regardless of the type of hedge fund you are applying to, but especially if you are commenting on the next quarter or several quarters out in a multi-manager case study or interview.
If the stock is already up +20% in the past 8 weeks and you want to pitch a long into earnings, you need to show some understanding of why that’s the case. Same thing on the short side. There must be a very good reason why the market is rewarding the stock with that kind of move. What has happened intraquarter? How has it affected sentiment and positioning?
If you are an analyst on the job:
It’s about understanding your strategy, your competitive advantage and whether data plays a role in that. Even if doesn’t, you should still pay attention to any meaningful inflections.
If you are a long/short investor with a longer-term holding period, it’s not always about getting in and out of a position. Sometimes it’s just about adjusting sizing or positioning a little differently heading into earnings. If the stock is down meaningfully in the weeks leading up to the print, you might not want to take the hit and should start repositioning. At the very least, you need to understand why it was weak - what if there was some fundamental change challenging or disproving your thesis? At the end of the day, quarters feed into the year, and the year feeds into the next several years. Inflections can absolutely impact the long term. In fact, they are necessary for the change in value to take place in the long-term.
Bottom line: You should at least be moderately aware of intraquarter moves, no matter your strategy.
Setup & important caveats
What is a setup?
You should think of a “setup” through the following questions: