by Traders Reserve | January 12, 2013 9:00 am
Gentlemen and gentlewomen, start your engines. Earnings season has arrived and as usual, companies reporting operating results are seeing significant swings in price after the news is reported.
The environment is rich for profitable trading. Simply buying call or put options on these companies can result in doubling your money or more. It can also result in big time losses if you are on the wrong side of the trade.
Together we can find the right side of the trade by taking advantage of inefficiencies in pricing that are often present before results are released.
So far we have seen numbers from companies like Alcoa (NYSE:AA), Helen of Troy (NASDAQ:HELE) and Tiffany (NYSE:TIF). All three of the reports were entirely predictable and thus tradable.
Alcoa kicked off the season by matching estimates for earnings, but beating the number on the top line. That news and positive forecast for aluminum demand resulted in shares moving higher on the news.
Helen of Troy rebounded from a weak quarter in the prior period. Its results sent shares soaring. On the other hand, luxury retailer Tiffany disappointed the market with weak performance and its shares sank.
The action in those three names is a microcosm of my own expectations for the coming onslaught of operating reports. Essentially I’m very bullish on the materials sector and very suspect of the retail industry.
There’s more to my game plan, but these two sectors are a very good start if you are looking for the best trading opportunities during this current earnings season.
Here are five sectors, including materials and retail, that I would look to trade for the biggest profits:
The punishment endured in 2012 by many materials players including Alcoa is likely to be followed by optimism and global growth in 2013. Stock prices are too low, expecting the worst with respect to economies across the globe.
In particular, steel stocks look poised for a rebound. China will lead the way there as the country rebounds from what, by their standards, was a recession. That won’t be the case this year. Japan, too, is stimulating its economy. Combined, the Asian tigers will be roaring.
I made AK Steel (NYSE:AKS) one of my top stocks for 2013. It will also be a stock to watch when it reports earnings. The numbers are likely to be the trigger for a significant rally in share price. If you are looking for whales – a trade that jumps by 500% or more – look no further than the materials sector.
During the fiscal cliff nonsense in December, much was said about the resilience of the consumer. Spending seemed to continue unabated. Confidence was high.
The same cannot be said of the corporate side. CEOs seemed to be quite worried during the whole month, possibly even delaying plans for the coming year until the issue was settled.
One of these two parties had things right? Was it the consumer or the CEO?
Now that earnings season has begun, we shall see just how strong the consumer was. The reality is that taxes are going up in 2013 and there might be more increases down the road. One would expect consumers to retrench at some point.
For retailers, that is likely to mean weaker-than-expected numbers in hindsight and caution for the future. On average I’m expecting stocks in the retail group to be weak during the coming earnings season.
It is way too early in the year to gloat, but one of my top stocks for 2013, Delta (NYSE:DAL), is already up an astonishing 13% year to date. Considering the market is only up 2.5% in the same amount of time, I would say something special is happening at Delta.
But it’s not only Delta that is doing well. The entire airline sector is booming in the first two weeks of trading this year. Powered by analyst upgrades, fuel price declines and planes chock full of travelers, the sector is one to keep an eye on during the current earnings season.
The only caution here would be that the stocks in the group have jumped in such a short time frame. Typically that momentum will hold when companies report earnings. The numbers are likely to be very strong, thus leaving plenty of future gains on the table for earnings traders.
The key is valuation and expected profit growth. Even with the gains, valuations are still low. At the same time, expectations for profit growth is strong. The combination is rare and should be exploited when present.
An interesting story is brewing in technology. On one hand, the explosive growth in tablet computers and smartphones bodes well for semiconductor stocks. On the other hand, the demise of the personal computer is crushing traditional players like Intel (NASDAQ:INTC), Hewlett Packard (NYSE:HPQ) and Dell (NASDAQ DELL).
Basically, there are winners and there are losers. Earnings Players can play both sides when these names come to the earnings confessional.
Within that dynamic, semiconductor stocks represent some of the best value in the market at the moment. Analyst estimates for names in the group are suggesting profit growth of more than 20% for many names. Valuations nowhere near reflect that optimism.
The great equalizer is earnings. When the market gets actual results in can more accurately reflect the optimism in the form of a higher stock price. Look for some big jumps in share value from names in the sector this earnings season.
One of the biggest riddles during earnings season will be in the homebuilder segment. In 2012, stocks in the sector surged by more than 100%. Can the group keep the momentum going in 2013?
I’ve been right about homebuilders from day 1. I was on record being short homebuilder stocks in 2007 and I waited patiently, unlike many, to call the bottom in October of 2011. I made KB Home (NYSE:KBH) one of my top stocks for 2012.
From an earnings trading perspective, the current quarter is likely to be choppy – none of the names in the group made my list for top stocks for 2013.
Valuations from a book value perspective are far from cheap today. The bar on results is set pretty high. If there is a miss the drop in share price after the news could be precipitous.
Then again interest rates are still remarkably low. Conditions are ripe for the industry to further gains in 2013. Valuation might be a secondary issue for traders.
If bookings are strong and profits beat expectation investors are likely to continue bidding up share price. Whatever the case may be the homebuilding sector will be volatile during the current earnings reporting season.
That bodes well for Earnings Players looking to profit from the event.
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