Investors are Leery of Intuit Inc’s Muted Guidance, And You Can Profit

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Intuit Inc. (NASDAQ:INTU) reported earnings last night, and it beat on the top and bottom lines. However they missed on earnings-per-share guidance for the next quarter, coming in below expectations by a wide margin. I expected the stock to fall sharply on a disappointing guidance note, but it didn’t on the headline. It is now actually up 2% — and therein lies the opportunity.

Of late, we’ve seen traders severely punish stocks that deliver muted guidance even if they had tremendous out-performance on all other metrics. But in this case they didn’t, so it shows relative strength for Intuit stock.

In fact, INTU came into the earnings report up 20%, whereas the S&P 500 is almost flat, so it’s clear that investors have extra faith in the future of this proven performer. I want to also be long this stock so today’s trade is bullish, but one that doesn’t chase upside hopium.

What I learned from today’s INTU price action into a disappointing guidance gives me more confidence that support will hold this year. I believe in that moreso than in the potential of more upside from here. So instead of buying shares at face value and placing my money at risk immediately, I prefer to sell downside risk into proven support levels. This way I generate income with no out-of-pocket expense.

The trick is to choose my levels carefully so that I don’t have to sweat the small dips. This is especially important in a trading environment where headlines are abundant. We have the U.S. and China negotiating for tariff levels via tweets, and I don’t want to get caught in the crossfire.

If I’m wrong and my level fails then I end up owning shares of Intuit at a deeper discount than current price. In that worst-case scenario, I am confident that I can manage out of the stock with profits over time.

Intuit although not cheap with a 50 price-to-earnings ratio, but it has the performance to support it. It can sustain a premium valuation for as long as they are delivering on growth. This tax season must have been especially challenging given the recent changes in the U.S. laws. So I imagine that their weak guidance had something to do with that. This is perhaps a situation where they want to under-promise so they can deliver three months from now.

Technically, Intuit stock rises fast and then pulls back to consolidate and form pivot points so there are several of those to choose from for the next few months. My choice is perhaps more conservative then I need to be but that allows me to sleep better at night knowing that my risk levels have a sizable buffer between now and trouble.

INTU Stock Trade Ideas

The Trade: Sell the INTU Oct $160 put and collect $2.75 per contract to open. Here I have a 85% theoretical chances that the price will stay above my level. Else, I will accrue losses below $157.25.

Selling naked puts is daunting. Those who want to mitigate that risk can sell spreads instead.

Nicolas Chahine is the managing director of SellSpreads.com.

The Alternate Trade: Sell the INTU OCT $160/$155 bull put spread which has about the same odds of winning and would yield 15% on risk. Compare this with risking 191 per share here and without any room for error expect a rally profit.

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Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.


Article printed from InvestorPlace Media, https://investorplace.com/2018/05/investors-are-leery-of-intuit-incs-muted-guidance-and-you-can-profit/.

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