You wouldn’t know from next week’s earnings schedule that this is the lull between seasons. The last full week before Christmas brings a sack full of earnings news that’s sure to please anyone looking for some action.
We’ll see plenty from the tech sector, with Oracle (ORCL) Research In Motion (RIMM) and Adobe (ADBE). Retail and related consumer spending is in play with Best Buy (BBY), Rite-Aid (RAD), Nike (NKE), Darden Restaurants (DRI), General Mills (GIS), CarMax (KMX) and Carnival (CCL). Add in Accenture (ACN), FedEx (FDX) — which already gave us a rosy forecast this week — Joy Global (JOYG) and Hovnanian (HOV), and it’s easy to see that next week will be busy.
Earnings aren’t the only focus next week. We’ll see the producer price index (PPI) and consumer price index (CPI), capacity utilization and industrial production, and building permits and housing starts. Oh yeah, there’s a Federal Reserve Open Market Committee (FOMC) meeting next week as well.
All this comes during a slower trading week, which means that stock prices could be more volatile than usual, especially with all the news that could potentially surprise or disappoint. And, as we all know, it’s all about the reaction to the news rather than the news itself that’s important to us as traders.
I want to discuss a couple of earnings plays that sit at opposite ends of the spectrum in terms of volatility.
General Mills (GIS)
Let’s start with the calm, and some might say, boring. It’s General Mills (GIS), as in the cereal maker, and the company reports on Dec. 17.
You won’t find a steadier uptrend than that belonging to GIS. The stock is up 48% off its March low — nothing spectacular, but not bad, either. But look at the chart.
The stock has closely followed its 20-day moving average higher throughout the run. And when that trendline failed, the 50-day has been there to provide rock-solid support. In fact, the stock has closed below the 50-day just once (by a penny) since the beginning of May.
When General Mills beats estimates, it pops higher (note the gaps up on Sept. 23 and July 1). When it misses, as it did in March, the stock gaps lower. Pretty simple.
Where will GIS fall next week?
Analysts expect a 6% gain in profits for the quarter, which compares favorably with the average 15% increase General Mills has achieved for the past four quarters. Interestingly, the whisper number calls for a 12% profit gain. The bet here is that GIS will come through and the stock should shoot higher off its 20-day moving average.
So, if you’re not averse to “boring” profits, a call option play may just be in order here.
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Research In Motion (RIMM)
On the other hand, we have Research In Motion (RIMM), which also reports on Dec. 17.
RIMM’s chart is all over the place. From mid-March through mid-June, the shares jumped 143%. Then they dropped 26%. Then went up 39%. Then down 38%. You get the picture.
In fact, the 30-day historical volatility for RIMM is 45%. Compare that to General Mills’ miniscule 14%. Also, compare how many times RIMM’s moving averages have changed direction compared to GIS.
Currently, RIMM is on a bit of a run, thanks in part to Wednesday’s 5% gain. In doing so, the stock has retaken its 20-day and 50-day moving averages.
In keeping with that volatility, RIMM’s moves after earnings are large, as in “make some serious cash” large — provided you’re on the right side of the move.
During the past four quarters, RIMM has averaged a jump or drop (three pops and one drop) of more than 13% in just the day following the earnings report. That’s one day.
Play the right option, and you’re probably looking at a 100% gain in a day. Not too shabby.
Analysts expect Research In Motion to report profit growth of 25%, which is a tad higher than the average of the previous four quarters. But the whisper number is higher, calling for a 32% gain.
That makes me nervous. So does a low put/call ratio, which shows heavier interest in calls compared to puts.
It appears that expectations are running high toward RIMM, meaning that the company may need a blowout report to satisfy the Street. If you don’t think the company has it in them, then you should probably look at put options, because if Research In Motion’s earning don’t satisfy the Street, the stock will likely take a big hit.
Related Articles:
- 12 Keys to Trading Earnings for Profits
- How to Play a Post-Earnings Move
- Trading Option Straddles During Earnings Season
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