Video game titan Electronic Arts, Inc. (NASDAQ: ERTS) reports earnings after the bell on Tuesday. Analysts expect the company to pull in five cents per share, a big improvement on last year’s loss of 37 cents. ERTS has been all over the map on earnings hits and misses, with five beats, two meets, and three misses in the past 10 quarters.
Few stocks have been as consistent following earnings as ERTS. Consistently poor, that is.
Over the past four quarters, the shares have fallen an average of 6.7% in just the day following each report. In fact, the last time the stock gained ground after reporting was in February 2009.
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It seems that the Street doesn’t believe in recent history. The latest articles on ERTS seem to have a bullish tone, suggesting that analysts are looking for an earnings beat. One analyst raised his price target to $23 (the current price is around $18). The last time the stock traded that high was in June 2009. Others are looking for positive guidance.
We don’t want to be a buzz kill, but such optimism on a stock that was trading in the $50s less than two years ago may be a tad unwarranted. At the very least, it’s probably premature. We tend to avoid (or play puts) on stocks on which exuberance appears to be misplaced. That seems to be the case with ERTS.
Other signs of optimism are modest short interest and a low put/call ratio coming off a bottom that suggests more put activity. The only ones who appear cautious are analysts, less than half of which rate the stock a “buy.”
On the chart, ERTS was swept lower along with the broader market, but is not bouncing back as strongly as any of the major indices. The 50-day moving average has kept the stock at bay for the last two days, and heavy overhead call open interest should help this resistance.
ERTS has the look of its most famous sponsor, Tiger Woods, whose video game has been a huge hit for ERTS for years. Tiger is coming back after a major setback. But the comeback has been slow. In fact, he just withdrew from a tournament this weekend due to an injury.
ERTS is following the same path. It was beaten down and will come back. It just may not be in the next quarter or two.
Given the history of sharp post-earnings moves, a May put would do just fine if you want to use ERTS for an earnings play. A post-earnings drop similar to the past four would put the shares around the $17 level, making an ERTS at-the-money May puts a good bet.
Game on!
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