Earnings aren't hard to navigate, they're actually very simple.
Ratio and fundamental scores don't matter. Those are the tools you use to find stocks that you are going to hold and pass on to your estate.
Profits and forecasts, they matter, but not as much as you think.
It all comes down to one thing. One word...
Expectations.
No, I'm not talking about an arbitrary "target" some analyst sent in a text message to their assistant during a long lunch.
Those "expectations" are put out there for the lemming of the market.
I'm talking about the real expectations. The expectations that are hidden in plain sight. The expectations in the market data.
Those are the expectations that the market reacts to, and knowing them will give you an edge, period.
I don't have a lot of time, so let's get right into the expectations for a company that's set to report its results.
Let's get down with Walt Disney Co (DIS)
The streaming wars have taken their toll on several companies, including Disney.
The reason is relatively simple. The "river" became too wide and shallow regarding streaming content. That has worked against Disney twofold.
- Pricing
Unlike other providers, Disney has held pricing on streaming services steady while we've seen price hikes in the industry. The reason perhaps goes back to the two consecutive quarters of lost subscribers and the company's need for retention moving forward.
- Subscribers
I just mentioned the two-quarters of subscriber losses that Disney has faced. ESPN+ continues to look for direction - which is likely to be the potential upside for Disney's earnings call - as other streamers continue to grow offerings.
YouTube TV (GOOGL) snagged the rights to the popular NFL Sunday Ticket from DirecTV (T), growing its streaming footprint.
Another intermediate-term contributor to Disney's outlook is the ongoing industry strikes. Another curveball.
The stock has been acting accordingly as shares of Disney are flat for the year and remain in a long-term bearish trend.
Shares of DIS are below their 50-day moving average which is also in a bearish trend. To put that into perspective, 65% of the S&P 500 stocks are trading in bull market trends.
In addition to its long-term bear market trend, Disney stock is getting ready to break through a huge technical support level at $85. Breaking this "floor" would take out the April 2020 "Pandemic Lows" and spiral the stock towards prices it hasn't seen since 2014.
We are still seeing optimistic sentiment, despite the poor fundamental and technical picture.
Want the Crown Jewel of Optimism? Barron's just dropped this cover story on your front porch last weekend.
The "Cover Story" effect is real. The optimism that Barron's reflects with this cover story suggests that the market's expectations for the stock are still excessive.
I call this "sliding down a slope of hope" when it comes to expectations.
Here's where the expectations turn into a trade.
Despite the clear fundamental challenges, The Street's expectations for DIS remain optimistic.
A break through $85 will garner the attention of the long-term bulls similar to the reaction that we've seen in AT&T (T). For the record, both AT&T and Disney are in the same sector, communications. And I already mentioned the relationship in the media industry by way of DirecTV.
Trade the continued breakdown and the disappointment from the crowd will add to the selling pressure from both a short- and long-term perspective.
I'm positioning for this move using a longer-term option, the November 17, 2023 DIS $90 put. This option provides both time and space for DIS shares to continue their decline.
Any short-term pop higher on any headlines from next week's earnings report should be absorbed relatively well by the time aspect of this option. I'll manage the position using the stock's technical patterns, focusing on the $88 level as a potential exit.
As always, I wish you the best trading success.
CJ
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About the Author
Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.