Earnings Season Strategy: Why Oversold Stocks Offer Better Risk/Reward

by | Jul 29, 2025 | The Doctor's Dose

The Smart Earnings Season Strategy Traders Are Using Now

Earnings season is in full swing, and with it comes the potential for both significant gains and painful losses. For traders and investors, understanding the starting point of a stock’s price action is a critical part of any earnings season strategy.

Earnings season strategy

Why a Beat Isn’t Always a Beat

A common misconception during earnings season is that strong earnings automatically translate to higher stock prices. This past Thursday told a different story: American Airlines Group dropped 9.6%, IBM fell 7.7%, and Honeywell International declined 6.2%—despite all three reporting earnings that topped expectations. The issue? Each of these stocks had already posted double-digit gains over the past three months.

On the other hand, Raymond James Financial climbed 3.7% and CenterPoint Energy rose 1.9% despite reporting profits that fell short of estimates. This contrast highlights the importance of evaluating a stock’s position heading into earnings.

Oversold vs. Overbought: The Key to Post-Earnings Moves

Katie Stockton, founder of Fairlead Strategies, emphasizes that stocks that are oversold going into earnings often have a lower bar to clear. “We like stocks that are relatively oversold coming into earnings,” says Stockton. “They theoretically have a lower bar set in price terms as investors absorb the earnings data.”

Oversold is a technical term that refers to stocks that have declined sharply, often due to negative sentiment or prior bad news. As a result, much of the negativity may already be priced in—making it easier for these stocks to rebound if earnings are merely “less bad” than feared.

Stocks to Watch: The Oversold List

According to Fairlead’s analysis, six stocks stand out as potential candidates for a positive earnings reaction:

  • American Tower REIT (AMT)

  • Visa (V)

  • Procter & Gamble (PG)

  • Merck (MRK)

  • Mondelez International (MDLZ)

  • CVS Health (CVS)

These stocks have gained just 3% on average since the April lows, lagging the S&P 500 by roughly 22 percentage points. With an average Buy rating ratio of 72% (compared to 55% for the broader S&P 500), they are also fundamentally supported by analysts.

The Overbought Challenge

In contrast, stocks that are overbought heading into earnings face a much higher bar to continue climbing. Fairlead’s “overbought” list includes:

  • Amazon (AMZN)

  • Meta Platforms (META)

  • Microsoft (MSFT)

  • Boeing (BA)

  • Royal Caribbean Group (RCL)

  • Seagate Technology (STX)

These names have soared an average of 66% since the April lows. While Wall Street remains bullish—Meta, Microsoft, and Amazon have Buy ratings near 90%—it will take stellar earnings reports to push these stocks significantly higher.

Lessons for Investors

The key takeaway for any earnings season strategy is that price momentum going into a report often matters more than the earnings numbers themselves. Overextended stocks may face profit-taking even after solid results, while oversold names can surprise to the upside if expectations are already low.