Earning season will hit a stride this week as almost 35% of the S&P 500’s companies will announce their quarterly results. Among these companies are some large names like Apple Inc. (AAPL), Ford Motor Company (F) and Facebook Inc (FB).
Earnings season is always ripe with opportunities for trades, as post-earnings moves are typically larger than normal. The catch is getting the direction of the move correct.
This earnings season is providing an edge for investors who are looking closely at profit expectations ahead of announcement. On the aggregate, S&P 500 earnings have been forecast to come in more than 8% lower than a year ago as continued global weakness weighs heavily on the economy and corporate profits.
That said, companies with lowered expectations and pessimistic sentiment are in potential sweet spots.
We commonly refer to the situation as an opportunity for companies to “under-promise and outperform.” If you expect your child to bring home a “D” in English and they come home with a “C,” you’re relatively happy. The same situation applies to companies where investors expect bad results. If a company has low earnings expectations and beats by a penny, investors will celebrate with a rally. But if a company has high expectations and beats by a penny, it can fall to the ground.
We’ve identified three stocks whose expectations give us a good idea of what the stock will do after earnings: Apple, Freeport-McMoRan Inc (FCX) and Ball Corporation (BLL). Here are the numbers you need to know:
Freeport-Mcmoran Inc (FCX)
Gold bugs are alive again as inflation and the lower dollar have pressed gold prices higher. The results are increased activity among companies that mine for gold, copper and other basic materials.
Freeport-McMoRan (FCX) stock falls right into this sweet spot.
At the beginning of the quarter, analyst expectations for Freeport’s earnings were for a loss of 7 cents per per share. A week before the company announces earnings, and the same analysts are now expecting a 17-cent loss.
Investor sentiment toward Freeport-McMoRan is negative as the short interest has been on the rise, though not at extremes. This suggests traders are posturing for a negative report. Similarly, only 21% of the Wall Street analyst coverage falls into the buy category.
Expectations appear to be awfully low ahead of Tuesday morning’s announcement, meaning that in-line expectations might be enough to help FCX continue its recent rally.
Apple Inc. (AAPL)
In Apple’s case, the bar may still be too high for the upcoming report. Analyst estimates have remain unchanged at $2 per share on the earnings side — the same that we saw two months ago.
Provided all of the peripheral signs that the company may be seeing weakness in sales, we could be set up for a disappointment on the earnings front.
Sentiment remains optimistic toward Apple stock as short interest is low and the analyst buy recommendations are high. Put simply, this appears to be a situation where the market is expecting Apple Inc. to surprise, meaning in-line or disappointing earnings could set AAPL up for a round of selling.
The charts support a short-term bearish target of $92 as AAPL remains range-bound. Traders should consider locking in profits ahead of tomorrow’s report.
Ball Corporation (BLL)
Ball Corporation (BLL) makes everything from consumer packages to pieces for aerospace and satellites. We’ve seen a reversal in earnings performance, as the company has swung from disappointments to beats over the past two quarters.
We like the fact that the analysts estimates have not changed over the last 2 months, meaning that investors haven’t increased their expectations, despite the strength in industrial-and consumer-related companies.
Investor expectations ahead of earnings are low, and sentiment indicators remain negative; Ball Corporation’s short interest ratio is a very high 10.1. This suggests that an in-line or better earnings announcement will catch the market off-guard and likely spark a rally higher.
The chart for BLL stock is already strong, and an earnings result of 69 cents per share or higher will continue this strength with a target of $80.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.