There are lots of earnings reports to choose from for the next few weeks., and that means lots of trading opportunities. We’re going to look at one that reports this week … but with a slight twist.
It’s Abbott Laboratories (NYSE: ABT), the drug manufacturing giant, which reports before the open on Wednesday. Here’s the twist. We don’t expect earnings to have much of an impact. Huh? Stay with us here.
You won’t find a more orderly and well-behaved company than ABT when it comes to earnings. The last time the company missed an estimate was more than six years ago. Over the past four quarters, the company has beaten the estimate by a penny, four cents, a penny, and two cents. And each of those reports reflected year-over-year profit growth of 13%, 15%, 11% and 16%. Can you say “consistency”?
This quarter analysts expect a 13% increase in profits from a year ago, putting it right in the middle of the past four quarter’s worth of growth. Not very exciting, but very predictable. What’s more, the stock’s price action is usually modest following earnings. That is, earnings usually don’t rock the boat. If the stock was in a trend before earnings, the trend usually continues.
And that’s our main reason for liking ABT before and after earnings. Let’s face it, earnings and the market’s follow-up reaction is often a crapshoot. Companies can surprise or disappoint, outlooks can be all over the map, and stocks can do all sorts of crazy things after a report. The stock can be overbought or oversold, traders may sell the news, etc. In other words, there’s plenty of uncertainty.
But that’s usually not the case with ABT. The company’s record of modest earnings beats, steady growth, and steady price action takes a lot of the uncertainty out of the equation.
Right now, ABT is enjoying an impressive, steady uptrend along its 10-day moving average. In fact, the shares have closed below this trendline just once since Aug. 31.
Sentiment toward ABT is mostly positive (with the exception of a higher-than-normal put/call ratio), but it should be based on the stock’s recent success. Peak call and put open interest in the November series lies below the current share price, meaning that put support is more likely than call resistance. Again, we’re not seeing anything here that should upset the Abbott cart (hey, I just thought that one up).
In short, look for ABT’s earnings to largely be a non-event and for the stock’s momentum to continue. Normally, we’d recommend a front-month option for an earnings play, but this isn’t a normal earnings trade. Instead, buy some more time by playing the ABT Dec 52.50 Calls. This option is already a dollar in the money, and that should make this trade even easier to swallow.
