What is a Triple Play?

Triple play is a slang term for when a stock simultaneously beats analyst expectations for revenue and earnings, then also raises earnings guidance for future quarters. The term triple play was first popularized by Bespoke Investment Group in the mid-2000's and is seen as a highly positive sign for the stock. Some investors like to look at triple-play stocks as a preliminary filter for finding good stocks to research for investment.

Key Takeaways

  • A triple play is when a company raises earnings guidance and also beats revenue and earnings forecasts.
  • Not all companies issue guidance, and thus can't have a triple play.
  • While a triple play is typically considered positive, the occurrence of one doesn't always mean the stock will rise on the announcement, or that it will continue to rise after.

Understanding the Triple Play

A triple play is seen as a highly positive sign for a stock because it indicates that not only is a company growing its business and earnings, but also doing it in a way that is expected to last over the next quarter, year, or more, depending on the guidance offered.

Often when a stock beats revenue and earnings estimates, analysts wonder if the higher numbers can be expected to continue. If the company does not raise guidance, it may indicate that management expects a drop in the next period.

Some companies do not offer guidance, and therefore, won't have triple plays. They can still beat revenue and earnings estimates, though.

Revenue and Earnings Estimates and Price Action

If a company can beat revenue and earnings expectations, this is typically a good thing for the stock price. Analysts were expecting certain numbers, and the company beat those numbers.

There is also something called the whisper number. The whisper number is what the market or traders believe the revenue and earnings figures will be. Traders may be positioned accordingly ahead of the announcement, or they may be waiting to get in following the announcement if they like what they hear.

Because of the whisper number, stocks don't always react as expected to favorable or unfavorable revenue and earnings numbers. For example, a company may come out with both revenue and earnings numbers 20% above the analyst consensus numbers, and yet the stock tumbles dramatically on the news.

This can happen for several reasons, including an entity with a big position using the good news to exit the position. Since most people will interpret the news as good, the big seller may assume there will be lots of eager buyers and so they unload their position with the heavy volume. It could also be that traders were actually expecting (whisper number) revenue and earnings 50% above analyst expectations. In other words, traders were expecting the company to blow away the estimates. When the actual numbers come out marginally better than the estimates, traders dump their positions (or don't buy more) because they are expecting more and had likely paid a high price based on their lofty expectations.

Guidance Pros and Cons

If a company issues guidance, and not all do, it can be both a good and bad thing.

On the bright side, it provides information to investors. Assuming the company is providing quality and accurate information, this information can help investors plan out what they want to do with the stock over the next quarter, year, or longer. As new guidance is provided, the investor can adapt accordingly.

The downside is that the company is looking after its own interest as well. Guidance may be "tweaked" so that investors hear what they want and it benefits the share price. For example, after a long rally a company may issue very upbeat guidance in order to push the stock a little higher, even though the stock may already be overpriced and the company facing longer-term challenges. Or, a company may low-ball their guidance, so that come next quarter they look fantastic when they beat their own guidance and likely analyst estimates based on the guidance.

These are just a couple examples of how guidance could be used to not necessarily reflect the best information, but rather is used to potentially cause short-term spikes in the share price at various times.

One might argue that eliminating guidance would be beneficial, although this too has its drawbacks. Guidance allows for investors to adjust positions over the course of the quarter (or longer), and assuming the company has quality guidance their earnings results shouldn't be as volatile. A company that doesn't provide guidance (or a company that misses their guidance numbers from the prior quarter/year) could see a lot of volatility around earnings as investors have less of an idea of what to expect.

Real-World Triple Play Stock Example

On May 23, 2019, Medtronic PLC (MDT) reported a triple play, according to Bespoke, and the stock gapped higher.

Triple play on MDT stock May 2019
TradingView

This doesn't always occur. Sometimes the stock gaps lower, as it depends on the whisper numbers and other factors. In this case, the price also continued to rise following the announcement. Once again, this isn't always the case. Sometimes the stock will rise initially, and then fall. Or it may fall initially on the news, and then rise or continue falling.

The triple play is just one thing to look for, but it shouldn't be relied on exclusively.