6 Hot Earnings Trades for the Week Ahead
by Chris Johnson and Jon Lewis | October 22, 2010 10:00 am
6 Stocks, 3 Hot, 3 Not
| The upcoming week will be the busiest of the Q3 earnings season, with more than 1,000 companies reporting. So how do you decide which ones hold the most opportunity? Let us do the heavy lifting for you. For our Winning Edge trading service[1], we comb through all the companies about to report and identify the biggest potential movers.It’s not just past performance and technicals that interest us (although those are important). We also look at what we call the “expectational environment” surrounding each stock. If expectations are high, we’ll tend to be more skeptical of the stock’s post-earnings performance. On the other hand, lowered expectations often lead to strong price action following even a mediocre report.
So here are six stocks that we think will make big moves after earnings — three up and three down — and how to play them with options. |
 Double Your Money on the Rumor AND the News[2] |
Amgen (AMGN) – Bullish
| Biotech giant Amgen, Inc. (NASDAQ: AMGN[3]) reports on Monday after the close, with analysts expecting a 15% decline in profits from a year ago. AMGN has been on something of a regulatory roll of late, with the most recent being an FDA OK to continue with its revenue-producing anemia drug.The company has beaten analyst estimates in four of the past five quarters, and the stock generally does well after reporting. With AMGN breaking above a trading range that has restricted the shares since May, look for earnings to shove the stock toward its April high in the $61 area.
Sentiment toward AMGN is mixed, although the put/call ratio is coming off an annual high. That tells us that pessimism among options traders may be unwinding, a signal that has produced positive price action in the past few months. Go with an AMGN call option to take advantage of the continued momentum. |
 Double Your Money on the Rumor AND the News[2] |
American Axle & Manufacturing (AXL) – Bullish
| American Axle & Manufacturing Holdings, Inc. (NYSE: AXL[4]) provides drive train systems and components to the U.S. automotive industry. The company reports earnings on Friday before the open. Analysts are looking for 38 cents per share compared to a loss of 18 cents a year ago. Starting in April 2008, AXL went on a string of seven straight losing quarters. To make matters worse, it missed the consensus earnings estimate five times, usually by a wide margin. But the past four quarters have resulted in three beats and a tie, and the stock has responded well after three of those four reports.Technically, the shares have been in a tight trading range for the past two months. For the past couple of weeks, the 100-day moving average[5] has provided firm support and should give the stock a solid launching pad after earnings. But the main reason we like AXL is lingering pessimism among the shorts and analysts. Short interest is coming off a peak last seen in November, just before the stock went on a six-week 80% rally. And just one-third of covering analysts rate the stock a “buy,” leaving plenty of room for upgrades.
With car sales pointed higher, AXL should manage another beat. If so, look for the combination of technical support and unwinding pessimism to break the stock above its current range, rewarding AXL call buyers. |
 Double Your Money on the Rumor AND the News[2] |
AutoNation (AN) – Bullish
| AutoNation, Inc. (NYSE: AN[6]), the largest U.S. auto retailer, is scheduled to report earnings on Thursday before the open. AN’s new vehicle sales soared in September, logging a 35% gain from a year earlier compared to 29% growth in the overall industry. That bodes well for quarterly earnings, which analysts expect will increase just 17% over last year. Given that AN has produced earnings increases of 66% on average for the past four quarters, it’s a pretty safe bet that the company will log its eighth straight earnings beat on Thursday.On the sentiment front, two things stand out. First, just two of nine covering analysts rate the stock a “buy.” Given the company’s recent sales numbers, there’s a better than good chance that AN will receive an upgrade or two after earnings. Second, short interest is monstrous. Even after the biggest decrease in short interest/float ratio among all S&P 500 companies in the latter half of September, the stock still has the highest ratio. That tells us two things: 1) Pessimism among these shorts is beginning to unwind and could be the sign of a massive short squeeze[7]; and 2) There’s plenty of short interest left to provide added buying pressure.
Another earnings beat could unleash a huge short squeeze that sends the stock and its call options soaring. |
 Double Your Money on the Rumor AND the News[2] |
DeVry (DV) – Bearish
| DeVry Inc. (NYSE: DV[8]) is among the bigger members of the embattled for-profit education industry, which is under heavy scrutiny for its marketing practices and job-placement performance. If you’re going to receive the lion’s share of your revenue via government grants and aid, you had better keep your nose clean, especially these days. Look at rival Apollo Group, Inc. (NASDAQ: APOL[9]), which got creamed after its earnings report last week.DV also took a hit after Apollo reported, to the tune of around 17%, some of which it’s recovered over the past week. But now it must step into the earnings confessional on Tuesday after the close. The company hasn’t missed an estimate in two years, and expectations this quarter are far below the actual growth logged the past few quarters. But it’s not about what DV did last quarter. It’s all about what will happen next. After all, Apollo beat its estimate.
The other problem for DV is that despite beating estimates, the stock has not necessarily followed suit. One-week drops of more than 14% after the past two reports should make you nervous … or excited if you buy DV put options. |
 Double Your Money on the Rumor AND the News[2] |
DryShips (DRYS) – Bearish
| Dry bulk shipper DryShips Inc. (NASDAQ: DRYS[10]) is scheduled to report on Wednesday after the close, and analysts expect two cents less than a year ago. DRYS has a spotty history of beating earnings estimates, having missed in two of the past three quarters. Performance after earnings is also suspect. In fact, the stock has been lower two weeks after three of the past four reports.Sentiment toward DRYS tends to the positive, especially among options players — the ratio is currently at an annual low and short interest is minimal. On the charts, the shares are struggling with their overhead 20-day and 100-day moving averages. That’s not good for a stock down 27% for the year.
In short, we’re not seeing much to get excited about with DRYS. Look for more of the same with its upcoming report and consider put options. |
 Double Your Money on the Rumor AND the News[2] |
International Paper (IP) – Bearish
| International Paper Company (NYSE: IP[11]) reports earnings on Wednesday before the open, and analysts are expecting a lot from the company — a 113% gain in profits from a year ago. But given that the company did nearly that exact thing last quarter, maybe the expectations aren’t as high as one might think. What’s more, IP hasn’t missed an estimate in the past nine quarters. That’s a good thing, right? Well, maybe and maybe not. Take the last two quarters, for example. Both earnings reports came near peaks in the shares that were followed by declines of around 20%.The main problem for IP is a combination of overhead resistance on the charts and some optimism that seems misplaced. A month-long uptrend has been stopped in its tracks by both the $24 level and the 200-day moving average. Heavy call open interest at the $24 strike is probably also a factor.
As for sentiment, short interest is negligible, while 10 of 13 analysts rate the stock a “buy.” Not much room for upgrades there. That means IP will have to rely solely on a strong earnings report and outlook to plow through technical resistance. The odds are against that happening, so consider IP puts. Double Your Money on the Rumor AND the News — Learn how to cut through the rumor and manipulation surrounding corporate earnings announcements and bank money-doubling option trades all year long. Download our FREE trading guide here.[12] |
 Double Your Money on the Rumor AND the News[2] |
Endnotes:
- Winning Edge trading service: https://order.investorplace.com/index.jsp?sid=WRC169
- Double Your Money on the Rumor AND the News: https://investorplace.com/order/?sid=WU3156
- AMGN: http://studio-5.financialcontent.com/investplace/quote?Symbol=amgn
- AXL: http://studio-5.financialcontent.com/investplace/quote?Symbol=axl
- moving average: https://investorplace.com/225/how-moving-averages-work/
- AN: http://studio-5.financialcontent.com/investplace/quote?Symbol=an
- short squeeze: https://investorplace.com/535/short-squeeze/
- DV: http://studio-5.financialcontent.com/investplace/quote?Symbol=dv
- APOL: http://studio-5.financialcontent.com/investplace/quote?Symbol=apol
- DRYS: http://studio-5.financialcontent.com/investplace/quote?Symbol=drys
- IP: http://studio-5.financialcontent.com/investplace/quote?Symbol=ip
- Download our FREE trading guide here.: https://investorplace.com/order/?sid=WU3156
Source URL: https://investorplace.com/2010/10/options-trades-on-company-earnings/