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We've started three weeks of rapid-fire earnings reporting as the most important earnings season in 10 years continues. Today we're looking at three more "confirmation quarter" stocks you can trade now.
Companies' earnings need to justify the whopping $10 trillion in wealth that's been created in the stock market since March. As I told you earlier this month, companies gave nearly zero guidance on how they'd fare in the "COVID economy." Yet investors bought shares anyway.
Without forward guidance, investors were speculating – betting these stocks would perform in their favor.
Now it's time for companies to show they're worth the investment – to confirm what buyers believed when they picked up shares. And stocks that disappoint could take huge hits.
But no one has to sit and watch their wealth wiped out by any earnings surprises. You can use the three-step earnings season strategy I shared with Money Morning readers to navigate this crucial quarter.
I'll make it even simpler. I'll give you three more stocks about to report earnings and tell you exactly how to set up to make money. Get in before earnings and you can turn a nice profit in just days. Let's get started.
Let's Look at How We Did Last Week
First, let's take a quick look at how my first round of earnings plays performed for you.
We nailed it on iRobot Corp. (NASDAQ: IRBT)! The company's earnings report was better than expected on all levels, and their guidance was positive. But remember, this stock more than doubled since the March bottom as investors' speculation ran wild.
Investors had set the bar so high for iRobot that it was almost impossible for the report to confirm the speculative prices. The stock is trading almost 20% lower than it was before the report.
Congratulations if you followed my strategy to buy the September $80 puts for around $8.00. These options are trading near $12, a 50% profit in just a few days.
Quest Diagnostics Inc. (NYSE: DGX) beat analysts' expectations and reiterated their previous forward-looking guidance. Think about it, in this market, that guidance is HUGE. The stock rallied about 3% and is in the process of seeing some selling pressure from the market as traders "sell the news."
The good news is that there's support at $120, which is where the stock looks attractive as a longer-term buy.
Core Laboratories N.V. (NYSE: CLB) came in with better-than-expected numbers, but the stock only moved 1.7% higher from that report. Energy names are seeing some buying as another stimulus package is being kicked around Congress this week, but Core Labs is still trading in a bear market trend, so that September $17.50 put still has time to turn a profit.
Now for what to trade this week…
Playing the Biggest Earnings Week of the Year
The week includes some of the biggest names in the large-cap technology sector.
Many of these stocks have been doing the market's heavy lifting as investors have gravitated to their names like moths to a porch light. This means that the market's bull run could face some serious tests this week.
We learned an important lesson last week from one of the large-cap tech names, Microsoft Corp. (NASDAQ: MSFT). Let's look at a quote from one of my newswires after Microsoft's report:
"That report [Microsoft's], however, wasn't bad. It was simply not as robust as investors' lofty expectations. What was bad was the reaction to the report, which has been a trigger for selling across the sector."
"Investors' lofty expectations" is the absolute key to what makes this earnings season so critical. This is exactly what I was talking about in my report last week. That's exactly why my prediction on iRobot worked out so well.
So, what do I see in terms of opportunities?
Sure, you could take a shot on Facebook or one of these other high-fliers, but look how that worked out for Microsoft. Look at these instead…
Microchip Technology Inc. (NASDAQ: MCHP)
The semiconductor stocks have been shooting higher through 2020, including Microchip Technology. The company provides a ton of semiconductor products to a wide group of industries. Its diverse offerings are one of the reasons I like the company ahead of its earnings report.
We're going to get a look at their earnings results after the market close on Aug. 4.
Shares of MCHP are trading about 25% higher since their last earnings report on May 7. The returns are less than the market and the semiconductor sector, which tells us something important: MCHP shares haven't been bid through the roof by wild speculation.
In their last quarter's results, the company beat the market's earnings expectations by 8%. They also beat revenue expectations, something a lot of companies missed. To investors' pleasure, the company's management confirmed their guidance looking forward, a big plus in this market.
The stock is sitting above its 50-day moving average, which is locked in a bullish trend higher. In addition, shares are trading in a long-term bull market trend heading toward new highs at $115.
All three of my earnings criteria are checked, putting Microchip Technology on my "Low Risk" or bullish list. The company's earnings report should give the stock a boost to new highs with a target of $120.
The Sept. 18, 2020 $110 calls are trading at about $2.90 per contract. These calls would leverage the move to my target nicely.
PayPal Holdings Inc. (NASDAQ: PYPL)
PayPal is one of those stocks that has found itself in the "stay-at-home" sweet spot. The company is well-known for their payment systems that allow small businesses and individuals to do business in-person and online. With all of the Etsy and eBay orders that have been processed, the company should have a lot to say on their earnings call on July 29.
Shares of PYPL are trading 45% higher than prices just ahead of their last earnings call. The rally, while impressive, still keeps the stock out of the "danger zone." You know, those stocks that have rallied two or three times more than the market for no reason.
Last quarter's earnings release gave a mixed view as the company missed earnings expectations while beating their revenue target. Investors looked over the earnings miss as the company gave assurance that their forward-looking guidance was still intact. In other words, they didn't see the pandemic derailing their business. Looking at the technicals, I love this chart. The stock has provided a low volatility rally, which has given traders the opportunity to buy short-term dips that were immediately supported by the stock's trendlines. The 50-day moving average is in a strong bullish trend, and shares are in a long-term bull market.
Bottom line, PayPal is on my "Low Risk" list with a target price of $200.
I like the Oct. 16, 2020 $180 calls as a nice way to leverage the move. These options are currently trading for about $12.00 per contract.
Bonus: PayPal is trading about 4% lower than its July highs. That tells me that the stock hasn't seen a last minute "buy the rumor" rally. This is great because it means we won't have to deal with a "sell the news" reaction as the stock targets $200 after its earnings call.
Ford Motor Co. (NYSE: F)
Ford finds itself in the "High Risk" category. Here's why.
We all know Ford as one of the Big Three automakers. Of course, Tesla is bigger than the Big Three combined, but that's another discussion.
We'll see Ford's quarterly results on July 30, after the close.
Ford shares misfired after their last earnings when the company missed both on earnings and revenue expectations. People just weren't buying cars. Of course, you gotta ask yourself: How many cars have they sold since then due to the pandemic?
Despite the miss, the stock has been able to muster up a 30% rally. Part of this is due to the "Robinhood Effect," as the stock became a social media buzz when Ford released the new Bronco. Now, I love this car, but it's not going to save the quarter for Ford.
The technical picture is mixed here. The "Bronco rally" has moved the stock into a semi-bullish pattern, but there's a catch.
The catch is that the stock is trading directly below its 200-day moving average. This is the same trendline that put a lid on the stock's June rally. That's a warning sign.
Another warning is that Ford is deep within a bear market trend. The stock has been trading below its long-term trendlines since January 2018.
All of this adds up to a "High Risk" outlook for Ford, with a target price of $6 or lower after Wall Street digests the earnings results.
The Oct. 16, 2020 $6 puts are an attractive hedge for this move, trading at just $0.32 per contract.
And in case you've missed it, you can get even more recommendations from me when you have access to my LIVE trading room. AND you can have expert options trades delivered right to your inbox each week.
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About the Author
Chris Johnson is a highly regarded equity and options analyst who has spent much of his nearly 30-year market career designing and interpreting complex models to help investment firms transform millions of data points into impressive gains for clients.
At heart Chris is a quant - like the "rocket scientists" of investing - with a specialty in applying advanced mathematics like stochastic calculus, linear algebra, differential equations, and statistics to Wall Street's data-rich environment.
He began building his proprietary models in 1998, analyzing about 2,000 records per day. Today, that database, which Chris designed and coded from scratch, analyzes a staggering 700,000 records per day. It's the secret behind his track record.
Chris holds degrees in finance, statistics, and accounting. He worked as a licensed broker for 11 years before taking on the role of Director of Quantitative Analysis at a big-name equity and options research firm for eight years. He recently served as Director of Research of a Cleveland-based investment firm responsible for hundreds of millions in AUM. He is also the Founder/CIO of ETF Advisory Research Partners since 2007, noted for its groundbreaking work in Behavioral Valuation systems. Their research is widely read by leaders in the RIA business.
Chris is ranked in the top 99.3% of financial bloggers and top 98.6% of overall experts by TipRanks, the track record registry of financial analysts dating back to January 2009.
He is a frequent commentator on financial markets for CNBC, Fox, Bloomberg TV, and CBS Radio and has been featured in Barron's, USA Today, Newsweek, and The Wall Street Journal, and numerous books.
Today, Chris is the editor of Night Trader and Strikepoint Trader and contributes to Money Morning as the Quant Analysis Specialist.