This week is extremely heavy on earnings events. A slew of mega-capitalization stocks are delivering their report cards, and some of the moves have been wild. Today I will focus on three great American companies — Apple (NASDAQ:AAPL), Boeing (NYSE:BA) and General Electric (NYSE:GE). All three have already reported and Wall Street is rejoicing.
But is now the time to blindly go long and chase their pops? It is important to evaluate the upside opportunity from here versus the downside scenarios that may be looming below.
Knee-jerk reactions to earnings are not always what ends up happening in the following days. That means it’s important to spend some time examining the particulars of the companies and their environments. Here there is no need to complicate things because simple logic more often than not is better than the jargon-filled expert opinions in your news feeds.
All three companies came into their earnings events with a high degree of angst. Apple faces the impact of the coronavirus on its sales in China. Boeing has its self-inflicted 737 Max problem. And General Electric is a complete mess in the middle of a massive overhaul effort. Investors truly had reasons to worry. Luckily in all three cases, the outcomes were favorable to the bulls.
Mega-Cap Stocks to Trade: Apple (AAPL)
This week’s headlines are littered with so-called Apple stock experts, all trying to digest earnings numbers. Both sides offer valid arguments and are correct, but what differs is the time frame. There is no need to overthink it up here. Depending on how long the investor’s time frame — and that’s different from person to person — Wednesday’s high is not an obvious long entry point. So there is no need to rush in and take a full position. This is where those who rode it here can book profits.
This is by no means a suggestion to short it. Apple is arguably the best company on the planet. It crushed earnings on almost every metric. Even the iPhone results topped expectations so CEO Tim Cook left very little for the bears to sell.
Yes, it is expensive with a trailing price-to-earnings ratio over 25. But the company is also in the process of changing how it earns money. A bigger chunk of Apple’s income now comes from services, so maybe the experts will eventually need to change the rulers with which they measure the stock’s value.
There is no denying the potential that AAPL has long term. If equity markets are higher in the future, then AAPL stock is definitely higher. So again the notion of time frames is the definitive factor in whether to buy it here at all-time highs. Only time will tell, but for the short term, any reason to buy in panic is gone. Apple crushed earnings and the stock rallied 3%. Compare that to Facebook (NASDAQ:FB), which was also up 2.5% on that same day without a catalyst. I bet that waiting out a few ticks will not cause anyone harm while Wall Street digests the results.
Boeing (BA)
Boeing management reported an earnings loss — the first annual one since 1997. Amazingly though, the company’s backlog of orders held strong. So in spite of the loss, BA stock rallied almost 3% on the headline. This is further evidence that short-term reactions to earnings reports are binary and they are more tied to expectations than the actual quality of the numbers.
In this case the company did not introduce new reasons for investors to fret. So the markets expressed a sigh of relief that things weren’t much worse than expected. The healing of this broken stock continues. From here, the assumption is that the new CEO Dave Calhoun is indeed fixing the problems that he inherited. It’s only a matter of time until Boeing will recover, but it would be foolish to expect a complete recovery as if nothing happened. The fact still remains that it made mistakes and people died. It will take years for investors to forget.
Furthermore, the Boeing 737 Max model still needs to fly again. This is a prerequisite for BA stock to fix itself, but it’s unclear exactly when the plane will return to the skies. This uncertainty adds some benefit because it scares away many shorts. It’s hard to short a stock that is awaiting a major headline that could unleash a bunch of buying.
Sometimes it’s easiest to zoom the charts out to see the facts more clearly. Boeing’s monthly charts shows how in spite of all its woes, the stock still held the plateau that shares claimed in 2017. If it can indeed fly the Max again then this whole ordeal constitutes a long consolidation zone. These are great bases for higher prices to aid in the BA stock reparation efforts.
General Electric (GE)
Yesterday General Electric’s management reported earnings and investors loved what they saw. GE stock rallied 10% on the headline. The company beat most expectations in spite of cutting its 737 Max motor deliveries. Investors focused more on the cash position than anything else.
It is likely that the rally comes from a sigh of relief that there were no new skeletons this quarter. New CEO Larry Culp sounded clear in his message and that projects an air of confidence. Wall Street hates uncertainty, and this is how he squashed it.
A relief spike is one thing, but maintaining a rally is another. Assuming that the stock will recover its old glory is being overly optimistic. There are levels on the chart that will pose resistance to the bulls. Going into $14 per share, GE shares will face resistance. This was a major ledge from which they fell 50% starting in October 2018. On the way up this means that shares will not be able to easily slice through the $14 level. A proper rally should fail and retry a few times to break out and hold prior necklines. If not, the stock would accumulate a lot of weak hands which makes for a shaky base.
If General Electric consolidates at pivot points it would have a strong base to put this nightmare to bed once and for all.
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. Join his live chat room for free here.
