Third-quarter earnings season starts this week, and the most-watched company will be Alcoa (AA). The company was known as the kick-starter for quarterly earnings, but it lost that title after being booted from the Dow in September 2013.
Alcoa shares were at $8.29 when they left the Dow, and they traded to a 52-week high of $17.75 last November. Obviously, the drop back to single-digits has been a disappointment for longer-term shareholders, which is why stop limits are great when it comes to protecting triple-digit profits.
The company reports earnings on Thursday, and Wall Street will is looking for $0.15 a share on revenue of $5.69 billion. The high estimate has Alcoa earning $0.21 a share, with a low forecast for $0.10 a share. This means headline news of a beat up to $0.06 a share or a miss as high as a nickel.
The highest revenue number is $5.98 billion, while the low estimate is at $5.48 billion. Alcoa missed estimates by $0.04 ($0.19 versus $0.23 forecast) last quarter, but revenue was higher at $5.9 billion versus estimates for $5.79 billion.
The company beat by $0.02, $0.05 and $0.08, respectively, in the previous three quarters. Revenues were higher in two of the three reported quarters.
Alcoa shares recovered a flattening 50-day moving average with Friday’s 3% gain. Near-term resistance is at $9.75-$10, followed by $10.50 and the 100-day moving average.
At current levels, there is risk to $8-$8.50 on an earnings miss and lowered guidance. If revenue numbers come in north of $6 billion along with a rosy outlook, shares could easily make a run past $10 to $10.50-$10.75. A slow and steady quarter that slightly impresses could have a less-dramatic impact on the stock.
Bullish option traders could target the AA November 10 calls (AA151120C00010000), while bearish traders could target the AA November 9 puts (AA151120P00009000).
Buying both of these Alcoa options together would create a strangle option trade that prices in a possible 10% move in the stock from current levels. The breakeven points would be $10.90 or $8.10, technically, by mid-November.
This is possible given the importance of this quarter’s announcement and the current volatility. Although I’m more bullish than bearish on Alcoa, I will likely sit this cycle out, I have several open trades in my Momentum Options portfolio that I want to take profits in before allocating fresh money.
I’m continuing to hold the Starbucks (SBUX) puts I recommended last week, and I still like the trade as long as resistance at $60 holds. MY exit target for the puts remains $1.80, and I do not have a stop loss in place.
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