This week is all about mega-capitalization stocks, as it always is when the “FANG” gang report their earnings. Let the reaction to Netflix (NASDAQ:NFLX) earnings be the reminder that the outcome of such events is binary. They crushed their numbers, yet the stock fell on the headline after a brief pop. So while all eyes are on the guesswork ahead, we trade the mega-caps that have already reported. The time to trade stocks with conviction is after the events, when we know more about their fundamentals and forecasts.
In addition, this time around things are more uncertain than ever. Most of the world is still under quarantine and companies are suffering tremendous losses. Consequently, the binary nature of all investments persists at least through the next quarter. The better way to risk money in the stock market now is to put the trader hat on, because conviction is scarce. So get ready to use hybrid strategies to trade these three fine mega-cap stocks who have already reported.
It is important to reiterate the fact that these are trades with medium conviction at best . Equity markets still face tremendous headwinds. The U.S. is committed to jump-starting this economy after the global quarantine, but success is not guaranteed. The few states that are coming back online are facing a lot of criticism, even from President Donald Trump. Any hiccup in their efforts would cause a major disappointment in the stock market.
The truth is that the world has never seen anything like this, so there are no experts. Therefore we must all be humble with our opinions when discussing these three stocks:
So read on to learn why these three deserve to be on your radar.
Mega-Cap Stocks to Buy: Intel (INTC)
Since everyone is stuck at home, demand on technology has never been higher. The trend was already in motion — the world wants to be online for everything. Amazon (NASDAQ:AMZN) started it over a decade ago, and other intrepid companies like Salesforce.com (NYSE:CRM) helped point it into the cloud. It is it mandatory for businesses to assimilate into the new model or be left behind.
The mandatory quarantine put this process into hyper speed. Zoom Video (NASDAQ:ZM) for example saw an explosion in usage because everyone is conducting business, classes, even parties online.
Demand for tech is not a fad, it is a theme that will last for decades. And Intel is one of those companies that will supply the brains for the operations. They just reported earnings, and the results were good, yet investors punished the stock for weak guidance. This is foolish — management was acting responsibly in the presence of extreme uncertainty. They deserve applause, not criticism.
I am fairly confident that if the stock market is higher years down the line, Intel stock will be too. They’ve had their c-suite issues in the past but they should be back on track by now. Of the three majors chip stocks, Intel is the cheapest. Its forward price-earnings ratio is 12x. Compare that to Advanced Micro Devices (NASDAQ:AMD) at 50x, or Nvidia (NASDAQ:NVDA) at 38x. And of late, Intel stock has been keeping up with the other.
The bottom line is they delivered excellent results under tremendous stress. Furthermore it looks pretty bullish because investors bought the earnings dip right away off $56 per share. This is usually a sign of more bullish intentions to come — especially if they can break out from $61 and $62 per share. The bulls with then have a legitimate shot at filling the gap to $64 and exceeding the recent highs.
This is a trade that could turn into a nice long-term investment, especially if buyers remain in control. Valuation is not an issue. High-tech companies this cheap are hard to find.
International Business Machines (IBM)
It’s no secret that I’ve been a critic of IBM for the last few years. It’s the only giant tech company that has failed to make a clear turn into the new subscription model. They continue to talk the good talk, but never show the matching results. Maybe this time it’s different, since longtime CEO Ginni Rometti left and the ship is under their new leader Arvind Krishna. I am prepared to give him the benefit of the doubt but a slight one at that. What I’ve seen so far doesn’t give me a tremendous faith the rhetoric still sounds the same.
Luckily the stock chart looks pretty darn good. If the bulls can beat last week’s highs, they can trigger a $12-to-$15 rally from there. The buyers jumped in at $114 per share to buy the earnings dip with force. They have set higher lows and now are attacking the neckline near $125. Yes, the earnings event was disappointing, but it didn’t last long.
Since I am still leery about the company’s commitment to success, I would rather trade this via the options markets because there I can structure a trade that doesn’t even require a rally to profit. Regardless of the method, I noted earlier that these are trades and this one should have a stop loss below last week’s earnings dip. If that level is lost then the thesis for this potential is wrong.
Even under normal circumstances, the healthcare and pharmaceutical sector stocks are wild. They are continuously susceptible to headlines and that has always made them tricky investments. Add to it the Covid-19 headlines on a daily basis and you have a formula for uncertainty to the nth degree. BIIB stock has been very volatile since February, swinging wildly between $266 and $375 per share.
It went into earnings near the top of said range, but the negative headline reaction sent it down 15% and now sits close to the lower end. The good news is that the bottom has held above $288. That could be the base for the next wave up. From a trading perspective, this is something we can work with. The assumption is that the range will hold until the bulls or the bears breach either of the edges. The bears did their thing off the earnings and now the bulls need to remount the efforts to breakout from $307. That is the doorway to close the giant earnings $25 gap.
This would be a trade, so it should have a tight stop loss. Some like to set them just below the immediate support, but in this case it seems reasonable to also assume secondary support above $272 per share.
Just like with the IBM scenario, I would personally prefer using the options markets to trade BIIB stock. I would rather buy calls or call spreads and sell put spreads to lower the out-of-pocket expense here. This is a fast mover, and I want to limit my immediate exposure.
Whether chasing the upside trigger or buying the dip into the secondary support, owning Biogen for the long term seems harmless enough. It is cheap with a single-digit P/E and 4x sales. Owning it here while it has headline risk it’s not outrageous.