This week felt like a bunch of push-pull action but in reality the bulls have been in charge since last Friday in spite of what the media coverage suggests. This morning stocks are rising on rumors of a Brexit deal but until the ink dries on the paper, nothing is fully priced in. The markets will react several times on the deal “announcement” and then one final time as it leaves the headlines. Nevertheless, there are at least three stocks to trade after their earnings as this season gets on the way. Today we look at Netflix (NASDAQ:NFLX), IBM (NYSE:IBM) and United Health (NYSE:UNH).
After hours Wednesday Netflix and IBM reported earnings and the reactions have been polar opposites. NFLX stock fans are rejoicing in spite of less than ideal statistics while Wall Street is hating on IBM stock. It will take a few days to digest the results before committing with confidence on either of these stocks. But for now the net effect of these two mega caps is not creating a drag on the Nasdaq Composite. So equities should continue the same price action as we get more earnings.
Experts on TV would have you believe that investors are reckless this close to all-time highs with so much that can go wrong. First, we have full employment in the U.S., so I just can’t see us plunging into recession, while everyone that wants a job has one. Second, the earnings reports are proof that corporations P&L’s and balance sheets are still very healthy, so they have no reason to fall into human capital cutting soon. Third, the options action suggests that Wall Street is buying put protection to outlive the headline threats.
Stock to Trade After Earnings: IBM (IBM)
It seems like the story never changes with IBM stock. Wall Street falls for management’s promises of turnarounds, but then when it comes to results, they always fall short. Last night IBM told their quarterly story and investors spat it back in their face. The stock is down 5% in pre-market action and for good reason.
I have been a critic of the IBM CEO Ginni Rometty for years, yet she has hung on to the top spot there. She must be one heck of a sales person to have convinced the board that the problem is in the company and not her. Sometimes it’s a matter of a change of air to make the turn like Microsoft (NASDAQ:MSFT) finally did. The MSFT under Satya Nadella hit over a trillion in market capitalization.
Fundamentally the stock is cheap selling at price-to-earnings ratio of 11 and yields 4.5% to boot. But that doesn’t mean it is a blind buy on this dip. So the trade for IBM stock now should come from the charts. IBM rallied 14% off the $130 zone from the August crash. So there is proven support there. Meaning that if I own the IBM shares, I would expect to see that support repeat itself.
For a bounce trade, you should still wait at least another day in IBM because candles this big are not often one-day events. There is no reason to be a hero when the company disappoints investors. The better way to catch a value-falling knife is to use the options markets. On bad days for IBM stock it is better to sell downside puts than to buy upside hopium. And there still is an open gap from the IBM January earnings report all the way to $124.80 per share.
NFLX stock is soaring on the earnings report. I am totally surprised at that since they missed on the important bits that matter to a growth stock. But for the short term, the earnings reactions are completely binary and it may take a few days to play out. Therefore, I wouldn’t suggest chasing the pop yet. It’s up to NFLX stock fans to prove to me that this is not a relief pop.
Wall Street prices Netflix as a growth stock. Meaning they give it an ultra-high valuation because of its growth expectations. Yesterday, management missed their top line, which is more important than making the bottom line for an aggressive company. If NFLX is more concerned about meeting profit than sales growth targets, then at some point investors will reprice the base valuation and that would be an ugly transition under the current circumstances.
Nevertheless, this is not the same as saying short the stock either. So I turn to the charts for clues. For the past five months, $290, $300 and $310 have been pivot zones. This morning, it looks like NFLX will slice through the first two and challenge the $310 line.
So this is definitely not an obvious entry point. I would rather see it tackle the resistance at $310 per share and close above it before chasing it. The ultimate carrot from here is the potential to close the gap from its last earnings report. But buying the NFLX stock in a sigh of relief that the report wasn’t a disaster and thinking it’s off to the races from here are very different. This is all before even discussing the competition effect that is soon to hit the NFLX stock from the Disney (NYSE:DIS) and Apple (NASDAQ:AAPL) video streaming services.
UNH stock has lagged this year, but this week it made positive headlines. The stock rallied hard, adding 9%. This came thanks to a positive reaction to earnings as management beat expectations and had positive forward guidance. The stock is fundamentally cheap, but that alone is not a reason to start chasing it here. Technically it has a tough slog ahead, but there is an opportunity lurking.
If I already own the shares then I could hold them into this positive action. But short term, this massive rally still hasn’t cleared the accident scene from Aug. 22. These ledges are resistance until they are taken out. So at the very least, I would want to see UNH stock bulls close above the earnings spike high before I consider chasing it.
UNH stock is also battling the resistance from the 50% Fib retracement level of the last correction. From here, the bulls need to prove that they can continue this rally. If UNH stock rises above $241 per share, then it would invite more momentum buyers. It is also important to note that the earnings pops left a large open gap of $221 per share. Eventually these gaps get filled. The $230 zone is important for the bulls to hold so they can retain short-term control over the stock price action.