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Have you ever seen a stock drop in price despite an earnings report that met or even beat expectations? Or one that rallies furiously after merely
meeting expectations? What gives? The answer is often contained in the sentiment environments surrounding the stocks prior to the event.We’ll go a little more in-depth about why this happens and then look at four stocks that are set to report earnings next week: GameStop (GME),
Hewlett-Packard (HPQ), Sears Holdings Corp. (SHLD)
and Deere & Co. (DE).The Street is in love with three of these stocks — and they are the ones that will likely sell off after earnings. And one of these stocks is getting
no love from the Street, but we think it’s going to rally big after announcing earnings. Keep reading to find out which stock is hot and which three
are not.
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Why Do Some Stocks Drop After Good Earnings?
When a stock falls after a company announces earnings results that meet or beat expectations, chances are sentiment was excessively bullish heading
into the event, which creates high expectations of a blowout report.High expectations can be a dangerous situation if the company disappoints the market by merely meeting expectations. They can also create what is
called a “crowded trade,” which leaves little money to flow into the stock after the earnings release, no matter how positive the report.Next: Why Do Some Stocks Rally After Only Meeting Expectations?
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Why Do Some Stocks Rally After Only Meeting Expectations?
When a stock soars after a company announces results that merely met expectations, it’s likely that sentiment was very bearish heading into the
announcement. Low expectations (lower whisper number, increasing put volume and short interest, lower analyst ratings) can lead to large post-earnings
moves higher if earnings simply meet expectations. In other words, the expectation bar is set so low that meeting earnings projections is considered
a positive for the stock.Often the result is that cash that was withheld from the stock based on pre-earnings pessimism pours into the market, pushing up demand and the
share price.
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The Key to Picking the Best Earnings Trades
Knowing how to properly position your portfolio based on a proper assessment of the sentiment surrounding a stock before earnings can pay off handsomely
after earnings come in. And the best way to leverage these sharp moves is through options, which can yield big results on large, quick moves in the
right direction.The key to picking the right stock for an earnings play is to find situations in which pessimism is evident during an uptrend (for a long position)
or optimism is present during a downtrend (for a short play).
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4 Stocks: 1 Hot, 3 Not
Now we’re going to look at three stocks that are awash in optimism and should be handled with great caution. If you own any of these, consider buying
a protective put option to offset a post-earnings drop. If you don’t own them, consider shorting or buying
a put to take advantage of the expected downside move.Then we’ll look at a stock that the Street is bearish on that could be poised for a pop higher.
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Hewlett-Packard (HPQ)
Hewlett-Packard (HPQ) hasn’t done too well after its past three earnings reports. In fact,
the shares have sunk about 6% on average after each report. But the Street doesn’t seem to mind. Sixteen of 21 covering analysts rate the stock a “buy,” leaving
little room for upgrades. And options players have been pumping up the call volume relative to puts, another sign of optimism.With the shares hitting resistance at the $44 level,
HPQ is showing all the signs of a stock looking to top out. The company reports earnings on Aug. 18.
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GameStop (GME)
GameStop (GME) is a Wall Street favorite. How much do analysts love GME? How about all
13 covering brokerages rating the stock a “buy”? And 10 of those are “strong buys.” It’s hard to get any more bullish than that. The put/call ratio
is within the lower 30% of all readings of the past year, signifying optimism among options players.Technically, the shares have run into a wall at their 100-day and 200-day moving averages near the 25 level. Such resistance coupled with over-the-top
optimism is a dangerous mixture that is best avoided or played on the downside. The company reports earnings on Aug. 20.Is your broker right for you? Take our quiz to see.
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Deere & Co. (DE)
The best known agricultural machinery company in the world is Deere & Co. (DE) — its
signature green and yellow hardware is a familiar site on farms, worksites and front yards. The company has seen a severe slowdown in revenue and
earnings during the past year as the global economic slowdown has taken its toll on the company.While analysts are expecting a drop in the upcoming report, slated to hit the wire on Aug. 19, sentiment toward DE appears to be tilted to the optimistic
side. Recent activity in the options market and other sentiment indicators suggests that DE is being priced for a positive earnings surprise. With
the stock topping out technically, heightened expectations such as those displayed toward DE more often than not result in a “sell the news” reaction
to the earnings announcement.Learn how to get paid to trade options — plus get 3 winning trades!
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Hot Sock: Sears Holdings Corp. (SHLD)
Talk about a stock flying under the radar. Sears Holdings Corp. (SHLD) is covered by just
five analysts, and all of them consider the stock a “sell.” In fact, four of the five rate the shares a “strong sell.” But that means the stock is
ripe for upgrades.Short interest on the stock is very high, raising the possibility of a short squeeze that
could boost the share price. Given how the stock has done following the past three earnings reports (up an average of 16% in two weeks), this extreme
pessimism could unwind into some serious buying pressure — and some serious profits for traders who purchase SHLD call options ahead of earnings.
The company reports on Aug. 20.This market is packed with opportunities to make big money… if you know where to look. Find the hidden money-doublers in today’s stock market. Learn
more here in your FREE Options Report.