With the third quarter earnings season underway, Catalyst Funds senior portfolio manager David Miller sits down with Brad Smith on Wealth! to talk about why post-earnings announcement drift is so important to his earnings season strategy.

Miller says he looks “for companies where they've demonstrated clear post-earnings announcement drift.” Post-earnings announcement drift, or PEAD, is the tendency of a stock to drift in the direction of earnings for a period after the results are announced.

PEAD is “one of the most powerful anomalies in finance, and basically what it says is that companies that have historically beat earnings in a significant way consistently tend to continue to beat earnings, and their stocks continue to do well. [The] same goes for those that have missed earnings consistently. They continue to do poorly. So [it's] not a surprising concept that winners tend to continue winning and the losers tend to continue losing.”

The portfolio manager says there are a few standout companies and industries where a PEAD has consistently occurred in recent quarters. He names the healthcare sector with companies like Novo Nordisk (NVO) climbing on weight loss drug popularity. Miller also highlights the networking space, including Arista Networks (ANET), as well as fintech companies like Visa (V) and Mastercard (MA).

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This post was written by Naomi Buchanan.