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Net profit fault – stock selection method combining fundamentals and technical aspects

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Net profit fault – stock selection method combining fundamentals and technical aspects


The essence of the net profit fault is the technical manifestation of the fundamentals of listed companies. Using this phenomenon to select stocks is actually an organic combination of fundamentals and technical aspects.

What is the net profit fault?

Mark Minervini, author of “Stock Magic,” mentions in the book that when the company reports net profit, my attention will turn to looking for the earnings fallout. The earnings fallout tells us that it may not be too late to buy stocks after companies report surprises. Even if you miss the first rally after the report, the aftermath of the big surprise could linger for a while. For major positive news or net profit surprises, after the stock price reacts immediately, there will still be a long adjustment period, and many studies have shown that this aftermath phenomenon can last for several months.

To put it simply, the net profit gap refers to the gap caused by the stock price being grabbed by people because the listed company’s performance has increased significantly in the release report. The net profit fault contains two contents, one is “net profit”, that is, the net profit exceeds expectations. The other is a “fault”, or a gap.

There are two types of net profit exceeding expectations:

1. The performance announced by the listed company exceeded the consensus expectations of the researchers of various securities companies;

Second, the other is that the announced performance exceeds the previously announced performance, for example, the announced performance is significantly revised upward;

In fact, the essence of the net profit fault is the technical manifestation of the fundamentals of listed companies. Using this phenomenon to select stocks is actually an organic combination of fundamentals and technical aspects. If we accept that the market is efficient, after a listed company announces better-than-expected results, the stock price will immediately respond – rising. The greater the performance exceeds expectations, the greater the rise, and even gaps rise. Since this gap is caused by performance exceeding expectations, it is called a net profit fault.

However, since net profit exceeding expectations needs to be compared with profit expectations, and the value of profit expectations is difficult to obtain, in practice, we can use the lower limit of profit growth exceeding a certain threshold to replace, and the default value of the threshold is 30, that is The default net profit growth needs to exceed 30%.

Practical application of net profit fault – TSMC(2330)

When it comes to the practical application of the net profit fault, the first thing that comes to my mind is TSMC (2330), the world’s largest wafer agency manufacturer. From March 2020 to January 2021, TSMC stock price surged 188% in 10 months. Undoubtedly, the massive surge in TSMC’s share price has been driven by its profitability. On the one hand, TSMC’s capacity utilization rate has further improved. In addition, due to the urgent global demand for chip production capacity, chip foundries have increased chip foundry prices. Since 2020, TSMC’s revenue has maintained rapid growth under the impact of the epidemic, regardless of sales or market share. There is an explosive increase.

2020Annual TSMC Financial Statements:

2020April 16,TSMC released the first quarter financial report, TSMC’s revenue was NT$310.6 billion, a year-on-year increase of 42%; net profit reached NT$116.99 billion, a substantial increase of 90.6% year-on-year, the growth rate hit a new high, and the gross profit margin was as high as 51.8%, an excellent performance that exceeded the industry. expected.

2021January 14th, TSMC announced its financial report for the fourth quarter of 2020, and its revenue once again hit a record high, reaching NT$361.53 billion, an increase of 1.4% and 14.0% year-on-year, respectively. TSMC’s 2020 annual revenue reached NT$1,339.255 billion, a year-on-year increase of 25.2%, and its net profit was NT$517.885 billion, a year-on-year increase of 50%!

TSMC’s net profit after the first and fourth quarters of 2020 reported a fault:

Net profit fault - stock selection method combining fundamentals and technical aspects

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