Last week, we hammered on Electronic Arts, Inc. (NASDAQ: ERTS) as a stock that historically does poorly after earnings. Form held last week, as the company beat the profit estimate but the stock fell nearly 6% the next day. That came close to the average 6.7% drop for the previous four quarters.
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We’re sticking with the same theme this week, talking about Advance Auto Parts (NYSE: AAP), which operates more than 3,200 retail stores throughout the eastern half of the United States. The company is scheduled to report on Wednesday after the bell.
Analysts expect a buck-per-share profit, a couple of pennies shy of the figure a year ago. The whisper number, however, is $1.10, a huge difference from the “pro” number. That could create a problem, especially given that AAP missed the consensus badly last quarter.
The other problem is that AAP has a recent history of dropping sharply the day after earnings. In the past three quarters, the market has shaved more than 5% off the stock in just the day after each report. And the company beat the estimate in two of those quarters.
Here’s the other thing: Note in the chart below how the stock has declined the day after earnings, but then recovered quickly. So if you want to jump on this stock, play a May put, and then look to get out quickly … if, of course, you believe in history repeating.
AAP’s sentiment picture is mixed, but it shows more than enough optimism that could unwind into selling pressure. The put/call ratio is sitting near an annual low and showing signs of putting in a bottom. This suggests that put buying could be gaining ground, a sign of some selling. And analysts are lukewarm toward the stock, so downgrades are possible.
As we said, this is a history-based trade. The stock hasn’t done well after earnings, and there’s no reason why the pattern won’t hold this week. But watch out for the snap-back rally.
Play a May AAP put, take your profit, even if it is modest, and then get out before the shares recover.
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