With all the companies reporting this week, the earnings trade possibilities are seemingly endless. So we might as well go after one of the biggies, if only because it generates so much attention. It’s the one and only Microsoft (NASDAQ: MSFT), which reports Thursday after the close.
Analysts expect 68 cents per share from MSFT, an 8% drop from a year ago. The whisper number is a penny higher, so there’s not much to read into that. The company usually beats or meets the estimate, and we expect that will be the case again this quarter. Not much to see there either.
The issue with MSFT is its price action following earnings. In a word, it’s usually soft. In four of the past six quarters, the stock has declined in both the one week and two weeks after reporting. The shares usually enjoy a nice rally into earnings and then give some back after the Street digests the news. The circles below show the past six post-earnings moves.
Microsoft Chart
Once again, the shares are gaining ground heading into earnings (albeit slowly). The stock is struggling to take out the 29 level, perhaps because overhead calls at the two closest out-of-the-money (OTM) strikes (29 and 30) have more than double the open interest than similar puts (at the 27 and 28 strikes). That tells us the path of least resistance is lower.
Sentiment, as one would guess, is aligned solidly behind the company. Besides the option configuration, short interest is unremarkable and 22 of 31 analysts believe the stock is a “buy” (with not one “sell”). Given that MSFT has underperformed the broader market for more than a year, it would appear that the Street is more enamored of the ticker symbol than the price action.
Yes, we know that the Xbox is selling well, the new Kinect has been a big hit, and MSFT is finally making some inroads in the smart phone world. But the market knows all that and needs to be surprised. This is a huge whale that has to be fed a lot of krill. And expectations are high. That’s not an encouraging combination. MSFT may well continue its uptrend in the intermediate term. But chances are it will take a step back after earnings.
Buy the MSFT February 29 Puts in the range of $1.25.
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