There’s always a lot of excitement around earnings season. But often the short term knee-jerk reaction to the reports doesn’t match the quality of the stats.
Investors don’t always reward good results. They react from a relative bias because of certain expectations. Sometimes a few words from the conference call can cause ruckus. This is all to say that from the potential messes come opportunities to buy the earnings dip in mega-cap stocks.
The reason I chose these large companies is because they have solid business models. The dips here are mere adjustments in price versus estimates. Therefore I can classify my attempts as swing trades disguised as investments.
On any given day, most mega-caps are sensible for bulls. There are plenty who see value in these names given a long enough time frame. This makes the risk in catching the falling knife much less severe than timing more volatile plays. Catching a falling knife in a frothy stock like say Hyliion (NYSE:HYLN), QuantumScape (NASDAQ:QS) or Nikola (NASDAQ:NKLA) is more dangerous. The price bottom is deeper than companies with a solid current P&L.
The rally out of the pandemic crash gave birth to a new kind of bull investor. The buyers are chasing the high risk model with avarice. The Russell 2000 index, a basket of 2,000 small cap stocks has rallied 140%. These are astonishing figures which should raise concern.
We have never been higher and things have never been worse. Don’t take my word for it just listen to Fed Chair Jerome Powell from his speech yesterday. Treasury Secretary Janet Yellen recently called for swift and strong action with stimulus. And finally why the politicians are panicking to dump $2 trillion into the economy. This is in addition to the $1.4 trillion (120 billion per month) from the Fed in asset purchases. If the patient is not extremely sick the doctors don’t administer massive amounts of medicine.
The performance of the three mega-cap stocks we chose today vary wildly. One is up 78% in a year while the other two are flattish to down. They are:
The party is fun until it stops and it’s always a surprise when that happens. Any bullish setups today must come with a macro-caution disclosure. Investors should exercise patience, set tight stops, and take small bites. Until the party stops, however, we can still trade with caution. All three setups today are short term trades. However, they can also serve as a starter position in longer term investments.
Mega-cap Stocks to Buy on the Dip: Cisco (CSCO)
Management reported earnings and investors threw a fit, with CSCO stock immediately falling $6 from $49.50. It closed off the lows on Wednesday above $47 per share, but still down -2.6% after beating expectations is not what the bulls want to hear today.
The problem is that normal beats these days are a relative fail when compared to the old days. Investors are used to double-digit moves and a few triples. In the age of “stonks,” boring stocks like Cisco need to spin more plates to wow traders.
Therein lies the opportunity to buy Cisco stock when it’s off the radar. Let’s first look under the hood. Revenues have remained flat since 2017, so no wonder not many clapped after earnings Wednesday. Given the lackluster performance and the lack of growth, 20 times price to earnings isn’t outrageous, but it certainly isn’t cheap. What I dislike most is that it has the same price-to-sales as Amazon (NASDAQ:AMZN). That potential froth could still bleed out of CSCO though, and the company will reward patient owners with 3% dividend yield.
Technically it has enjoyed a strong 31% rally off its prior earnings report. It’s okay for the stock to give some back. Wednesday’s dip brings it back to the neckline from which it broke out Friday. That’s all a part of normal price action and the bulls can still retain control. If that’s the case, then CSCO can easily rally back to close the earnings gap at $48.40.
With some luck, the momentum can take it above last week’s high. Should that happen, this swing trade would then go into high gear. The bulls are still trapped from 2019 above $50 per share. I bet they make a run for it provided that markets don’t correct and foil it. I would not want to stay long in this trade below $44 per share.
Take-Two Interactive (TTWO)
TTWO stock is 8% off its highs and these days one could reasonably call it a bearish stock. In reality this is a small blip in an astounding rally. Even after the earnings dip, it’s still up 100% from the March lows. Clearly this stock could fall some more, but that’s what tactical trading is all about. The goal today is to buy into support above $196 per share and ride the bounce back to $210.
Fundamentally, the Take-Two team has done very well, growing net income seven times in four years. This stock earned its rally, so if markets hold up buyers will flock. Technically, there could be further downside if the sellers persist. Therefore placing a tight stop below $192 would be a good idea for traders.
Investors could see more pain if they are willing to own it for a few months. Chances are, if it eventually falls to $180 per share it would find a solid floor there.
That price level has been in contention since last August, so the bears are unlikely to crush TTWO there. That’s a base that consolidated for four months before they broke out of it in December.
If this bull markets persists, AKAM stock has fallen into solid support. This is more of a zone than a hard line, so going long now is a starter position. Investors should leave room for error for two reasons.
First, the drop on earnings was too big so it’s not likely to be a one day event. Second, there is extrinsic risk from the markets having rallied so long without rest.
Additionally, the fundamental story with AKAM lacks pizazz. The tech sector has never been hotter yet this company found a way to stay boring.
Needless to say I would classify this as a swing trade not an investment. It’s too soon to “average down” for those already long the stock. This is not a cheap stock with a 36 price-to-earnings ratio and 6x sales. Valuation is not likely to contribute to the rebound.
The opportunity now is capturing a $10-$12 rebound rally. This would bring the stock closer to the upper edge of the horizontal channel from June. It would also fill the earnings gap opened Wednesday.
Unless I believed in the company long term, I would not want to ride this down another leg lower. I would stop out if AKAM fails to hold hold $100.50. Chances are there is support below that point, dating to November and May, but I don’t want to find out where exactly. Since this is a tactical setup, I do not want to turn this trade attempt into an investment.
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.