Earnings season is a time when companies present their offerings in hopes of appeasing the judgmental investing class. Those that satisfy the Street are showered with overnight profits, while those who dare disappoint are taken to the woodshed.
During the much anticipated earnings announcement the warm, fuzzy perceptions of investors finally clash with cold, hard reality.
While forecasting how the investing class will react to earnings is often a fool’s errand (they’re an unpredictable, fickle bunch), opportunities often arrive in the aftermath.
Recently a handful of high-profile stocks tumbled on earnings after failing to satisfy shareholders. And in the days since, low-risk setups for trades have cropped up.
Behold, three vulnerable stocks beckoning to the bears.
Bearish Stocks to Sell: International Business Machines Corp. (IBM)
International Business Machines Corp. (IBM) tops the list with an attractive sell the rally opportunity.
IBM fell 5.6% last Tuesday on heavy volume following its earnings release. Instead of seeing sharp follow-through selling, buyers swooped in to bid the stock up, filling the earnings gap in short order.
Unfortunately, sellers returned in force once the gap was filled, causing IBM to close out the week on a low note. If you think the stock may suffer a second wave of selling now that the knee-jerk buy the dip crowd has had their fun, now is as good a time as any to initiate bearish plays.
Buy the June IBM $150 put for $6.25. Consider exiting to minimize risk if IBM rallies above the $153.50 resistance level.
Bearish Stocks to Sell: Netflix, Inc. (NFLX)
Momentum favorite, Netflix, Inc. (NFLX) suffered its own earnings setback last week, falling 13% on heavy volume. Unlike IBM, though, NFLX hasn’t staged any type of sharp recovery.
Instead, Netflix has spent the past three trading sessions churning. And now a low base has developed, setting up an interesting breakdown opportunity.
From a technical viewpoint, NFLX is the most vulnerable of this bearish trio. Its earnings gap ushered the stock below all major moving averages upending its nascent recovery attempt in one fell swoop.
The setup for Netflix stock is simple: Watch for a break below the low of last week’s trading range ($93) to signal another wave of selling has commenced. Buy the June $95 put for $6.10.
Bearish Stocks to Sell: McDonald’s Corporation (MCD)
McDonald’s Corporation (MCD) has been on a tear of late, rallying some 33% over the past year before last week’s post-earnings fallout. Perhaps we have a classic buy the rumor, sell the news type reaction going on here.
Despite topping estimates, the jump in MCD stock Friday morning fizzled fast. And while the stock remains in an uptrend, the earnings rejection may be signaling short-term exhaustion in the stock.
With earnings in the rear-view mirror, options can now be snatched up on the cheap. If you think MCD could see more profit-taking in the days ahead, consider buying the June $125 put for around $2.64.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.