If you like to trade earnings, you can look forward to a monster week, as the season hits its busiest stretch next week. The docket shows 130 of the S&P 500 (SPX) companies reporting next week. That’s more than a quarter of the index. And 49 of them come on Thursday.
The main hope the bulls have for regaining momentum in this market is for expectations to be so low that companies will have to fall flat on their faces to disappoint. Higher expectations create a vulnerable environment in which investors will demand solid earnings and an upbeat outlook … at the very least.
When it comes to trading earnings, keep in mind that optimistic sentiment represents higher expectations and, thus, can create some vulnerability if those expectations aren’t met. Conversely, pessimism reflects lower expectations that often lead to upside earnings surprises.
Zimmer Holdings Should Surprise
Zimmer Holdings (ZMH) doesn’t roll off the tongue as a stock everyone knows.
That’s OK. I love stocks that fly under the radar. It’s on mine, and it should be on yours, too.
The company is scheduled to announce earnings on April 23.
Based in Warsaw, Ind., Zimmer manufactures medical appliances and equipment, including various implants, trauma products and related surgical products. There has been some negative press directed toward medtech firms concerning the effects of the recession and increased FDA scrutiny. But I love the skepticism, especially for a strong stock.
Pessimism is also evident among options players, who have pushed the put/call ratio into the upper quarter of all readings of the past year. In fact, the ratio may be peaking, a bullish sign of pessimism ready to unwind into buying.
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Analysts are likewise skeptical. Just one of 16 analysts rates the stock a “buy,” leaving more than enough room for skeptics to jump on board the ZMH bandwagon. According to Zacks, that’s the fewest number of buys in at least three months.
With all this negativity, the stock should be cruising at multi-month, if not multi-year lows, right?
Hardly. The shares are up 35% since their March low and have popped above all critical daily moving averages. Next up is some chart congestion in the $42 area and the 2009 gap high near $44.
The Street expects Zimmer’s Q1 results to show a 10% pullback. That’s not quite as much as Q4, but it’s worse than the average of the past four quarters. Let’s just say analysts are cautious. By the way, the company hasn’t missed an estimate for the past six years.
So what do we have?
A stock on a strong run that has low expectations. With the recession seemingly baked in the cake, look for ZMH to implant some bullish fuel with its report next week. I’ll be looking to play a call option.
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Jon Lewis is the co-editor of The Winning Edge trading service designed to help you make options profits around corporate earnings and other market events. For more information about Jon, read his bio here.
