by Traders Reserve | October 8, 2012 9:00 am
There is only one way to make money in this market today and that is to trade. More specifically, trading options of companies set to report earnings can generate gains irrespective of the daily shenanigans on Wall Street.
The market seems to be in a perpetual tug of war between bulls and bears. On one side of the coin are the bulls backed by the Federal Reserve and its QE Infinity program. On the other side of the debate are the bears worried about a global recession or worse.
While I can’t tell you the outcome of the debate or the direction of the market in the next few months, I am most certain there will be individual stocks that pop or drop when they report earnings. Even better is that with my Earnings Player system I can tell you what side of the trade to be on before the event.
It’s an approach that packs a powerful punch.
The Earnings Player game is so fun and lucrative it’s actually been hard to sit on the sidelines.
While we wait for third-quarter earnings season to begin in mid-October, a few trends are developing that we will surely want to play. One theme mentioned last week is to trade five stocks heading for the industrial cliff.
The other trend to play is to focus on the consumer. One silver lining in the current economic storm is the consumer. Retail sales have been surprisingly strong thanks to consumer spending. Add in QE Infinity and there does not appear to be much downside to consumer stocks.
Here are 5 consumer-based QE Infinity earnings trades to consider:
Visit a Buffalo Wild Wings (NASDAQ:BWLD) restaurant and one has to ask: What recession? The casual dining space is a great way to get a read on the economy and more specifically the consumer. Restaurants like Buffalo Wild Wings are jam-packed with happy patrons more than willing to fork over hard-earned dollars for a moment of relief from the daily grind. Beer, wings and sports is a great way to escape and the Buffalo Wild Wings model is a proven winner. The company missed earnings estimates in the last reported quarter. Shares sank on that news, but have since recovered. I expect a rebound for the quarter ending September.
If you are looking for signs of the economy hitting a brick wall this past summer, look no further than luxury retailer, Coach (NYSE:COH). The company saw its shares tank when it reported results for the June quarter. While beating Wall Street profit estimates by a penny per share in the period, Coach missed the mark on the revenue side. The culprit was slowing North American sales.
As per usual the near-20% decline the first day of trading after the news might be a bit overdone. The stock has made up half the losses since late July, but there is still room to appreciate further. Since the announcement of slowing revenue the economy has regained its foot ever so slightly. Consumer spending is strong. Look for Coach to rebound in much the same way it fell when it reports earnings this go around.
If for a brand with staying power look no further than Walt Disney (NYSE:DIS). The entertainment company knows how to use its brand power and position to great effect for shareholders. Steady is one word that comes to mind in describing the operating performance of Disney. From an earnings trading perspective, this one is all about valuation and beating the numbers. Disney has exceeded analyst estimates in each of the last four quarters and will likely do so again this quarter.
Wall Street expects Disney to grow profits by 14% in the fiscal year ending Sept. 30, 2013. At current prices, shares trade for 15 times next fiscal year estimated earnings. That’s too cheap for a big brand like this that will do better than expected thanks to a strong consumer and QE Infinity.
Shares of Family Dollar (NYSE:DG) soared by 4% last week thanks to a strong earnings report. All I can say is, “Duh!” The consumer may be doing well, but not that well. In other words, the value of lower prices and discounts will rule the day in the competitive retail space.
Dollar General and Family Dollar (NYSE:FDO) have done well since the start of the financial crisis in 2008. This year has been another banner year in the space, but shares of both Family Dollar and Dollar General have been trading lower since peaking in July. Earnings Player traders can take the pause as an opportunity to pounce. Dollar General has exceeded expectations in each of the last four quarters. They will likely do so again and when they do the shares should resume their upward trajectory.
Shares of McDonald’s (NYSE:MCD) are down more than 10% since peaking earlier in the year. Interestingly the stock has rallied at the end of the summer on the heels of an earnings miss that in many cases would have resulted in more selling in the stock.
Therein is the power of QE Infinity. With the Federal Reserve backstopping the economy, investors can take more risk, especially with retail stalwarts like McDonald’s. The 6-cents-per-share miss in the June-ending quarter notwithstanding, look for McDonald’s to soar this quarter. Even bad news might be good news given the power of QE Infinity. The cheap fare and excellent execution make McDonald’s a wonderful stock to trade in advance of its next earnings report.
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