With the number of earnings reports slowing to a trickle, our choices for solid earnings plays are dwindling as well. That’s why we’re going to take a different approach with this trade. It’s on JDS Uniphase Corporation (NASDAQ: JDSU), the maker of communications test and measurement equipment. The company reports earnings Wednesday after the close.
JDSU usually meets or beats the consensus earnings estimate. In fact, the company has missed just once in the past three years. The current estimate calls for 14 cents per share, an amount the company hasn’t achieved since April 2008. The whisper number is a penny more, which puts more pressure on the company to produce.
The thing about JDSU is that it moves after earnings.
After the past four reports, the stock has moved nearly 10% on average on just the one day after earnings. Three of those moves were higher, but last quarter the shares plunged 20% after reporting. That kind of unpredictable movement makes us wary of jumping in ahead of the report.
We also have a number of conflicting trading signals.
The shares are currently receiving strong support from their ascending 200-day moving average. But sentiment is generally positive, with a lower put/call ratio, low short interest, and 8 of 12 analysts rating the stock a “buy.” Plus we’re seeing heavy overhead call open interest.
What does seem to be consistent is that the stock stages a rally after the initial move, whether that move is higher or lower. Note in the chart below how the stock manages to gain ground in the week or two following that initial pop or drop.
So what’s the play? Wait until after JDSU reports. Let the initial move happen. Then jump in with a call option. Even if the initial move is higher and you miss some of the gain, the stock has a tendency to follow through such that you’ll do well with your call. And if the initial move is lower, as it was last quarter, you should be buying near a low.
What call should you buy? That depends. Stay close to the money (strike price near the current stock price), so buy a JDSU Sept 11 Call if the stock pops near the $11 strike, or a JDSU Sept 9 Call if it plunges. Either way, you should be positioned to take advantage of what we expect will be a solid upside move after the initial earnings reaction.
But remember, don’t buy until after JDSU reports. It’s just safer that way.
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