The market has looked stronger over the past few days after taking a beating during the latter half of January. That’s giving some hope to those who feel the recent slide was a healthy pullback rather than a dreaded correction.
Reactions to positive earnings reports are one reason for the turnaround. A week or two ago, blowout numbers were met with sell-offs, as we saw with Google (GOOG) and Intel (INTC), among other big names. But now earnings beats are resulting in strength and buying. Well, at least that’s been the case so far this week.
Though earnings season is on the decline, we’re still looking at plenty of reports coming up. Next week, 63 S&P 500 (SPX) companies are on the docket. And though most lack the sizzle and pre-earnings buzz of an Apple (AAPL) or Google, investors should have no difficulty finding something to their liking amid the offerings.
Despite the market turnaround (albeit brief so far), we’re going to go against the grain by discussing a company that’s had its share of issues. It’s Electronic Arts (ERTS), the videogame maker that many considered the standard bearer of the industry.
One of the company’s major problems used to be one of its greatest strengths — its sponsorship of Tiger Woods. The seemingly unflappable and consummate professional has been reduced to tabloid fodder, and his return to the game is a matter of debate. That creates a cloud of uncertainty, something the market hates.
In addition, the already competitive landscape is becoming even fiercer with the emergence of strong players from China, most notably Shanda Interactive Entertainment Limited (SNDA).
The stock’s price action is reflecting these struggles. The shares have been in a downtrend since peaking eight months ago, dropping around 30% in that time frame (the S&P 500 is up about 25%). The stock is currently struggling with its declining 50-day moving average, a trendline that rebuffed a rally on Tuesday.
Analysts expect ERTS to earn 31 cents in the fiscal third quarter, a 45% decline from a year ago. That may sound modest, but ERTS logged only 6 cents last quarter (missing the estimate by a penny) after two straight quarters of losses. So, by comparison, the current estimate is somewhat hopeful.
As for sentiment, analysts are hardly gushing over ERTS. But half rate the company a “buy,” which leaves plenty of room for downgrades. And the put/call ratio is in the lower third of all readings of the past year, meaning that options players are more interested in ERTS calls than puts. That certainly doesn’t agree with what we’re seeing on the chart.
The final nail in ERTS’ coffin is that it has done poorly after recent earnings reports. In fact, the day after the past three releases has seen the stock drop an average of more than 6%. With that kind of track record, the uncertain future of its franchise endorser, stiff competition and sentiment that is out of whack with its chart, ERTS looks like a bearish play to us, so you might want to jump on some put options.
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