While next week marks the start of first-quarter earnings season, there are a few names reporting earnings this week that are worth watching for possible bullish or bearish trades.
CarMax, Inc (KMX) is a stock I watch actively, but I rarely trade it. In fact, the last time I recommended a position in KMX for the Momentum Options portfolio was three years ago as of this month, and we made close to 38% on a bullish call option trade.
I’m usually more bullish than bearish on the stock heading into earnings, and I use price action and fundamentals to try to determine how shares will trade after each announcement. The next earnings release for KMX is scheduled for Thursday, before the market opens.
KMX Stock Chart
KMX stock has fallen from a 52-week peak of $74.55 to a low of $41.25, which was triggered in early February. The recovery stalled at $53, and the recent backtest to $50.75-$50.50 and the 100-day moving average is holding.
The company missed Wall Street’s estimates by a nickel per share last time around, while revenue of $3.54 billion also came in below expectations for a reading of $3.61 billion. There were four analyst downgrades on CarMax stock last month, although a fifth suit-and-tie suggests buying shares on any weakness.
Usually, when there are too many people leaning to one side of the boat, it tips over.
Current forecasts have CarMax earning 71 cents a share on revenue of $3.68 billion for the latest quarter. The prior three quarters before the five-cent miss resulted in a six-cent beat, a match and a seven-cent beat.
The 200-day moving average is north of $56, and the 50-day moving average is just above $47. Should one of these averages be reached, it would represent a move of 8%-10% in one direction or the other from current levels.
CarMax Stock Trade
The options market is also pricing in a possible 10% move in the stock. The KMX April $50 calls (KMX160415C00050000) and the KMX April $50 puts (KMX160415P00050000), purchased together, would create a straddle option trade for a combined cost of nearly $5 ($3.10 for the call option, $1.45 for the put option).
For the aforementioned trade to break even, KMX would need to be above $55 or below $45 by April 15. If shares are above $56 or below $44, a gain of 20% could be achieved.
This time around, I’m neutral on KMX stock (and the options), although the 50-day moving average is in a nice uptrend. If analysts are wrong about the quarter, they could reverse course and issue upgrades. Of course, an earnings miss or lowered forecast will make the slick-talking pros look like geniuses.
I may swing the bat on a possible earnings trade with some speculative money over the next week or two, but I’m not committed to KMX at this time. For now, I’m on the sidelines.
InvestorPlace advisor Rick Rouse is offering a special free report, “The 5 Golden Rules of Options Investing,” that reveals his rules for options trading success that will help you make double- and triple-digit profits in the months ahead no matter what the market has in store. Just click here to read it right now. Whether you’re new to options or have years of experience, the trading advice Rick will share can help you lock in bigger gains, find new winning ideas, wring the risk out of your trades and become a more confident and successful options investor. Click here now to download your FREE copy of The 5 Golden Rules of Options Investing.
