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Investor seeks to capitalize on a stock-market anomaly

Andrew Young, 19

Occupation

University student

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The portfolio

Positions include BlackBerry, Chipotle Mexican Grill, Stratasys and Skyworks Solutions.

The investor

Ever since reading Reminiscences of a Stock Operator and Market Wizards in middle school, Andrew Young "has been obsessively reading investment books and researching the markets." In his first year at university, he took classes at night so he could trade stocks during the day, hone his investing approach and write analysis for various investing blogs.

His investing approach

Academic financial journals have uncovered a number of "stock-market anomalies" that yield better returns than the market. One of these is the "post-earnings announcement drift phenomenon," whereby companies that beat analysts' earnings projections tend to see their shares drift higher in the following days and weeks. Given this phenomenon, Mr. Young believes there are above-average gains to capture from taking positions in companies soon after they report better-than-expected earnings. The positions are then unwound a week or two later.

Moreover, he has found through back-testing that "this phenomenon has been highly profitable if the stock has missed earnings estimates the previous few quarters in a row, making the earnings beat all the more unexpected." His back tests (using a software model and historical market data to simulate returns of a trading strategy) have also shown "increased profitability if the stock has a price breakout on large volume the day of the release."

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Sometimes he keeps stocks longer than a week or two. For example, he continues to hold BlackBerry because he is "cautiously optimistic" earnings will exceed consensus expectations in coming quarters, given CEO John Chen's track record.

Best move

It was buying call options (the right to buy the stock at a specified price for a specified period) on the shares of Chipotle Mexican Grill after the company released earnings last October. The stock trended up for the next 15 days.

Worst move

"I adhere to a strict risk management plan, so I rarely get burned on any one position for more than 2 per cent of my account."

Advice

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"Have an extensively back-tested investment strategy and risk-management process …"

Want to share your strategies? E-mail mccolumn@yahoo.com

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