Overall, this earnings season has been the polar opposite of the second quarter. While last quarter saw stock prices rally following most reports, this time, we saw almost every single company drop after unveiling their sales performance. I’ll explore a few of the reasons below, but one silver lining of the widespread profit-taking is it makes it extremely easy to identify the select few stocks to buy that ramped on the news.
Perhaps the lukewarm reception to otherwise solid numbers is due to many stocks having run so much beforehand. Think of it as a classic “buy the rumor, sell the news” reaction. Or, maybe the unwillingness to chase prices higher was because of the imminent election uncertainty or the surging novel coronavirus cases across the nation.
Most likely, it was a combination of all these factors. Regardless, after scanning my entire watchlist of the most actively traded stocks, I found the following three winners:
In a sea of selling, these three stand tall as the rare few who saw buyers swarm. Now, let’s take a closer look at each one.
Stocks to Buy That Won Big on Earnings: Alphabet (GOOGL,GOOG)
There’s no need to mince words on why buyers were so giddy in the wake of Alphabet’s earnings. The king of search smashed forecasts with earnings per share (EPS) of $16.40 on revenues totaling $46.17 billion. Meanwhile, Wall Street was expecting Alphabet only to rake in EPS of $11.29. And, unlike its other large-cap tech brethren, Alphabet shares rallied after hours on the news and delivered a robust up-gap the following morning.
Though the gains were pared, the stock still closed higher by nearly 4%, making it one of the few remaining tech titans still above its 20-day moving average. If that weren’t enough reason to deploy bullish trades, the stock is up another $100 to a record in the wake of the Presidential election.
Overall, don’t let the rich price tag of $1,750 deter you. We can use options for a lower-cost entry.
The Trade: Buy the Dec. $1750/$1770 bull call spread for $5.00
Pinterest is exiting earnings season as one of the biggest winners on the Street. Last week saw PINS stock rocket 30% higher amid a surge in revenue and user growth. Apparently, a global pandemic is good for business. The social media company raked in 13 cents per share on $443 million in sales.
Moreover, its price chart offers a powerful and consistent uptrend pushing well above a rising 200-day, 50-day and 20-day moving averages. Last week’s enthusiasm launched prices to all-time highs followed by a mild three-day pullback. A new upswing has since begun, and I think $70 is within reach before year-end.
With all of that in mind, call vertical spreads offer a simple way to profit.
The Trade: Buy the Jan. $60/$70 bull call spread for $3.75.
Stocks to Buy That Won Big on Earnings: Snap Inc. (SNAP)
Our final choice for the top stocks to buy is Snap. Price and volume exploded last month after the Santa Monica-based company surprised the Street with an unexpected profit. The one-day, 28% gain following the report has been added upon in the weeks since. The follow-through and high base that just formed should encourage bulls to continue their buying campaign.
At this point, traders should gear up for the coming breakout trade over $44. Short-term resistance has developed there and needs to be taken out before deploying new bullish trades.
That said, I’m sticking with my theme of bull call spreads. We’ll once again use January options to provide ample time for SNAP stock to make its move.
The Trade: Buy the Jan. $44/$48 bull call spread.
You can enter now for $1.20 or wait for the breakout to confirm and pay a slightly higher price.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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