The earning season is in full tilt on Wall Street, and that’s an exciting time for me. This is when I look for the plentiful opportunities that usually present themselves. I don’t mean taking positions ahead of earnings — I like to sift through the wreckage afterward. This works extremely well when looking for mega-cap stocks to buy — even when there isn’t carnage, like with the pop when Netflix (NASDAQ:NFLX) reported last week.
To be clear, that also is an opportunity — but don’t chase it. The smart thing to do is set the alert to catch it on the dip. Those who did that had the opportunity to buy the same NFLX stock a week later and 13% cheaper.
First it’s important to remind everyone that the reactions after earnings events are completely binary. Perfect proof of this is what happened Wednesday morning to Microsoft (NASDAQ:MSFT). The night before the report prompted jubilation in it and across all tech. The Nasdaq soared in after-hours trading. Then at the Wednesday lows MSFT stock was almost 7% lower than the headline high. The Nasdaq closed the day down 2.8%.
I’ve also seen the opposite situations happen where a terrible report receives a great upside pop.
The secret to the price action on the headline is in the expectations. Those are a mystery because they are subjective and personal. Price targets and revenue estimates do not tell the whole story. The sooner you accept that, the fewer potentially disappointing setups you will face around earnings.
The good thing about disappointments is that they bring about opportunity. Today we look at three mega-caps stocks to trade during the confusion. The stock market in general is still near all-time highs. Yes, Wednesday was painful for the bulls, but it’s a rare thing to have a red day of late.
Just keep an eye out to see if there is a negative trend developing. If not, then the bulls are still in control and they will eventually buy this dip as well.
This is where doing homework days off. On our list today are these three mega-cap stocks. Two we would buy and the third we won’t.
Mega-cap Stocks to Buy: Advanced Micro Devices (AMD)
AMD just reported earnings, and the stock fell on the news. It closed down 6% for the day but well off its lowest levels. On the face of it, the stock beat earnings and revenue estimates, but somehow investors wanted more.
Under the leadership of current CEO Lisa Su, AMD has been executing very well on plans. I have no doubt that they will continue succeeding for years.
The whole world is demanding more tech now than ever, especially after what happened last year. Moreover there are only a handful of suppliers of the brains to this tech, and AMD one of them. My bet is that they will all have room to prosper while this digital revolution expands.
Fundamentally, AMD stock is not cheap — and for good reason. They were the best-performing stock in the entire S&P 500 for 2018 and 2019. Growth like that doesn’t come cheap, so it’s okay. Compare that to Intel’s (NASDAQ:INTC) stock performance and how cheap that is. Those who opted to buy Intel for its value definitely regret doing so. AMD is up around 4,000% in five years, versus Intel’s 78%.
I would even argue that AMD is cheaper than Nvidia (NASDAQ:NVDA) and I usually get pushback on that. Yes, AMD’s price-to-earnings ratio is a lot higher than Nvidia’s but these are growth stocks and profitability is not the right metric to use. The price-to-sales of AMD is 40% cheaper that Nvidia. This means that the stock owners have half as much hopium built into it today. If the equity markets go through a bad stint, AMD would have less froth the shed.
This is a stock I would own for the long term. On bad days like yesterday, I would be selling puts or put spreads into what others fear.
Texas Instruments (TXN)
Texas Instruments also reported earnings Tuesday night, and the stock popped at first. Management beat all estimates on the top and bottom lines. Just like AMD, TXN stock gave up the ghost and fell 5% on Wednesday. I believe that this is another opportunity to catch the falling knife for as long as this remains a bullish market. I thought about choosing Apple (NASDAQ:AAPL) as a trade here, but TXN stock fell into a better pivot inside its chart.
Out of the pandemic lows, the stock has built an incredible ascending channel. A standout level is near $160 per share. That was a sharp top from last November that eventually served as a base for the last 10% rally. The earnings drop brings us back to that base, and I believe the bulls will step up to the plate. This would be a trade, not a full-size investment. I am not calling the bottom in TXN stock, but rather an opportunity to swing trad it higher.
If I don’t want to ride at a stock down, I should stop myself out below $159 per share. This is not to say it’s not worth it. I just wouldn’t want to find out where the bottom really is.
This is not an expensive stock, but it has risen a lot recently. Therefore there could be more pain especially if the entire market continues its slide lower. It has a trailing price-earnings of 32 and the price-to-sales is over 11. Neither of these are extravagant, but they are definitely not dirt cheap either. Conviction is medium, hence the tight stop recommendation.
I definitely don’t think you should go long this third stock today. In fact, I had been short Micron stock for the last few days. I closed my puts yesterday to balance my account.
My issue was with the message that came out of the earnings earlier this month. I wrote about it on Jan. 14. Even though I didn’t catch the exact perfect moment, the concept was solid. Management touted how great things were, even suggesting that they’ve never been better. Yet when I look at their profit and loss statement, I see nothing but dwindling results. I could not reconcile the two.
MU stock has now fallen 15% from its highs. Normally that would grab my attention to catch the falling knife, but not in this case. There’s a good chance that MU could fall another 10% to 12% before finding real footing.
The bulls have a cluster of support between $74 and $70 per share. I expect them to try and hold it, but if they can’t, the next pivot is near $64. Only then would I start to consider an entry opportunity for a swing trade.
The rally from November into December was too frothy. Rarely do you see charts that look like that use it as a base. Eventually market makers will want to revisit those areas to close out unfinished business. This could even extend all the way down to $55 per share. The least I can do is wait out the next few candles to see how this action plays out. I don’t believe I am missing much since we are still stone’s throw away from the all-time high.
I remember days not too long ago when I was long Micron by selling puts under $30. It was falling off a cliff, and the experts still called it a value trap. The P&L then was better than today. It had a 2.9 price-earnings ratio — now it is 10 times more expensive. I can’t justify it from the value, and I can’t justify it from the charts.
At this point I’d like to offer a notion an important notion of any bullish thesis. Our stocks do not trade in a vacuum. Meaning whatever idea I have about any stock, it has to work within the confines of the whole market. What just happened on Wall Street in stocks like GameStop (NYSE:GME) should raise alarms. People like us on Main Street are at a disadvantage but we know better and we wear seatbelts. It’s best to make sure you have some portfolio protection. In the era where the CBOE Volatility Index (VIX) does not fall below 20, the easiest thing is to simply buy VIX March call options for example.
Those who had them going into Wednesday made out like bandits on the mini correction we had.
The risk of holding those options is minimal overnight because of all the risks in the world. Unless they eradicate Covid-19, or find cures for cancer, or establish world peace, we are still going to have the same headaches tomorrow as we did today. Buying VIX calls on calm or green days is the cheapest form of insurance rental and investor can have.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.