The publicly described idea
The episodic pivot section of Kullamägi's three-setups article opens with unexpected good news, especially on a neglected stock, as the trigger for moves that can last months or years. Its checklist adds that it is best if the stock has not rallied over the past three to six months, and asks the reader to judge whether news is really a surprise if the stock has already made a big move into the gap.
His later episodic pivot post puts it more directly: the best EPs come on stocks that have gone sideways for three to six months or more.
Why neglect matters
The logic given in that post is that an EP is news that catches the market off guard and forces a revaluation. One reading of that logic: a stock that has already doubled into its report has had the good news partly priced in by buyers who anticipated it. A stock that went nowhere for months has not, so a strong report can force a larger repricing.
Second EPs on already-extended stocks
The same post notes that many EPs come on stocks that already made a big move from a previous EP. It says these can work, but the failure rate is higher and the move is probably smaller, and that such names are generally avoided for that reason.
The example in the article
The three-setups article walks through NVIDIA in 2016 and 2017. As described there, the stock had been going sideways for about four months before another strong quarter, with EPS and revenue growth of 126% and 48% and EPS of 85 cents against expectations of 67 cents. The article says that report started a move of about six months in which the stock almost doubled. The same chart shows an earlier report with a big beat where the stock gapped only slightly and sold off; the article says that one was not an EP.
Measuring neglect (our template)
The fields below are this site's own way of putting numbers on "neglected". They are study tools, not thresholds from the source.
- Prior performance: the stock's three- and six-month change up to the day before the gap.
- Base length: sessions spent in a sideways range before the gap.
- Distance from the high: how far below its 52-week high it traded.
- Prior EPs: whether it already had a 10%+ gap in the past six months.
- Coverage: whether analysts cover it at all. The article notes that many smaller stocks have none, so the numbers and the volume have to speak.
Record the same fields for every EP candidate, not just the winners, and compare outcomes by group. For the report itself, see the earnings EP checklist.
The neglect check
- Pull the three- and six-month performance before the gap.
- Mark the length of the base it gapped out of.
- Flag any EP in the prior six months as a second EP.
- Note analyst coverage and the size of the beat, if any.
- Log the result after one and three months.