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Look at your calendar. When was the last time it showed the date when a company would be coming out with huge news that could move the stock? The release of a new drug by Pfizer ()? Not there. Details on a new phone by Research In Motion ()? Nope. News releases that move a stock are typically a surprise to the market. They’re not planned. Except one — earnings releases.
No other price-moving event is scheduled like earnings announcements. This can work to your advantage… or against you. On the plus side, you know the date and time when the news is coming. Of course, everyone else knows when it’s coming, too. So how can you "beat the street" at this game and make profitable earnings trades?
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Beating the Street
Beating the Street at the earnings game is all about knowing the market’s true expectations for a stock. Over the past five years or so, the term “whisper number” has become more popular, as investors have figured out that there’s more than just a company’s balance sheet and earnings driving its stock price. Knowing the market’s expectations — not just the analyst expectations — for a stock will often provide the edge necessary to turn earnings season into a profit opportunity.
The more data and trends you can look at to determine not only what investors expect, but also how investors are positioning themselves for the expected move, the better. Simply put, tracking what people are doing can be more valuable than just tracking what they are saying. In other words, are they putting their money where their mouth is?
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Gaining an Edge
Our Earnings Risk Index (ERI) tracks the data and market activity necessary to assess how the market has valued a stock and whether there is a disparity between what the market expects and what the company is likely to deliver. The larger the disparity, the better the trading opportunity.
ERI uses technical, fundamental and sentiment data to quantify those expectations. And it has provided some big returns for our subscribers already this earnings season.
The following four stocks are among those favored by ERI as bullish earnings plays ahead of their upcoming announcements.
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Earnings Trade #1: Cerner Corp. (CERN)
Cerner Corp. () is a health care information technology provider, and that’s a hot place to be right now.
The company reports on July 29, and earnings expectations are modest. In fact, only a third of covering analysts consider CERN a "buy," which leaves plenty of room for upgrades. The stock needs to break through potential resistance at $65, and earnings could give it that boost.
Buy CERN call options.
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Earnings Trade #2: Hewlett-Packard (HPQ)
With strong numbers from IBM () and Intel (), along with some bullish comments from Dell (), look for positive results from Hewlett-Packard () when it reports earnings on Aug. 18.
After dipping earlier this month, the shares rebounded to hit a nine-month high. Sentiment is somewhat optimistic, but the stock should ride the bullish coattails of its competitors heading into earnings.
Buy HPQ call options.
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Earnings Trade #3: Sara Lee (SLE)
Don’t look now, but Sara Lee () is up about 20% in the past month. People gotta eat, and, thanks to the recession, they’re opting to eat at home more often.
SLE reports earnings on Aug. 12, and analysts expect earnings per share to be 5 cents less than a year ago. Last quarter, the company blew out the estimate by nearly 40%. With sentiment mixed (only a third of analysts rate the shares a "buy"), another beat this quarter should keep the rally intact.
Buy SLE call options.
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Earnings Trade #4: Tetra Tech Inc. (TTEK)
Tetra Tech Inc. () provides consulting, engineering, construction and technical services for resource management and infrastructure in the United States and internationally. Clearly, the company has a stake in the proposed rebuilding of infrastructure that serves as part of the foundation of the latest economic stimulus packages.
For now, the market appears to have ignored TTEK, as more than 60% of the current recommendations on TTEK are "holds." And short sellers continue to position themselves for further declines. We like the "surprise potential" headed into the upcoming earnings announcement on July 29.
Buy TTEK call options.
For more trading ideas, see:
- 6 Bargain Biotech Stocks
- The Best Alternative Energy Stocks Out There
- 7 Ways to Hedge Against Inflation
Another housing crisis? A shattering crackup and another stock market crash down to Dow 6,000? Most investors will get killed, but you can make a killing instead.
