Simple Trades, Monster Profits Module FOUR Earnings Trade Examples
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Simple Trades, Monster Profits
Module FOUR Earnings Trade Examples
Putting It All Together • We have our road map, our
execu0on strategy, and our understanding of probabili0es
• We are armed with everything we need to trade earnings.
• Let’s go big gain hun0ng
Earnings Trade Example #1 • Delta Airlines (DAL): Trading against the grain.
Identifying Delta Airlines (DAL) • What companies are repor0ng week of January 18th?
• Current market narra0ve: Oil price decline, target airline sector.
• Delta Airlines reports earnings January 19th.
Reviewing the Delta Airlines Chart
What Is The Fundamental-PE Gap? • Analyze the Es0mate Page.
• Obtain Current Price, Current year es0mate and Next year es0mate.
• Calculate the PE Gap.
Get DAL Earnings Estimates • Current Year-‐End
Earnings Es0mate • Next Year-‐End Earnings
Es0mate
Calculate DAL PE Ratio PE Ra0o = Current price/Current year earnings es0mate
DAL PE Ratio = 51.17 / 4.62 = 11
Calculate DAL Profit Growth Rate Profit growth rate = Next year earnings es0mate/current year earnings es0mate
DAL Profit growth rate = 6.37 / 4.62 = 38%
Calculate the DAL PE Gap PE Gap = PE ra0o -‐ Profit growth rate
DAL PE Gap = 11-38 = -27 Delta Airlines (DAL) is Undervalued
Successive Earnings Beats • Delta Airlines
(DAL): 4 Straight Quarters Bea0ng the Number.
Earnings Per Share Trend Increasing…
How Do Estimates Conform? • Share price movements down.
• Analyst Es0mates rising.
Delta Confirmation • Most recent headlines have pressured Delta shares. • Low-‐priced compe00on… • Pilots demanding higher wages. • Poor weather… • Selling enhances earnings trading opportunity. • Disconnect between chart and PE Gap suggests Call op0ons for Earnings Players.
Delta Earnings Trade Summary • Sideways moving stock… • Strong profit growth… • History of bea0ng the number…
• Posi0ve es0mates… • Doesn’t conform to nega0ve market narra0ve…
The Delta (DAL) Earnings Trade • Earnings Trade to Make: BUY At-‐the-‐money Call Op=ons expiring January 22nd.
• Execute trade in the last hour before expected earnings report a\er the market close.
• Close trade one hour a\er the market opens the following trading day.
Two Outcomes • Earnings miss and stock moves lower -‐ 100% loss on our call
op0on. • Earnings beat and stock rises…poten0al 600% gain on our call
op0on with a 10% gain on the stock.
Earnings Trade Example #2: • GoPro Inc: (GPRO): The Ul0mate in a “News” Stock.
Identifying GPRO • What companies are repor0ng earnings the week of January 25th?
• GoPro is a “momentum” stock repor0ng on January 26th. – Busted IPO…the “one trick pony” product? – Is it a fad, a tech stock or media company? – Shares heavily shorted.
Look at the GPRO Chart
Fundamentals With PE Gap GPRO Current Year Es0mates GPRO Next Year Es0mates
Calculate GPRO PE Ratio PE Ra0o = Current price/Current year earnings
GPRO PE Ratio = 18.88 / 1.17 = 16
Calculate GPRO Profit Growth Rate Profit growth rate = Next year earnings es0mate/current year earnings es0mate
GPRO Profit growth rate = 1.18 / 1.17 = 1%
Calculate the GPRO PE Gap PE Gap = PE ra0o -‐ Profit growth rate GPRO PE Gap = 16 – 1 = 15 GoPro Inc. (GPRO) is Overvalued
GPRO Estimates • GoPro missed es0mates last quarter.
GPRO Estimates Slashed • $1.17 versus $1.74 profit 90 days prior. • Did the cuts in es0mates go far enough?
GPRO Confirmation • Holiday season…dud or must have gi\? • Slow to realize the fad nature of GPRO? • Company facing increased compe00on. • Apple threat.
GoPro Earnings Trade Summary • Busted IPO breaks key price levels.
• Stock remains overvalued… • Analysts es0mates s0ll too high,
• Current nega0ve headlines result stock moving higher.
The GoPro (GPRO) Earnings Trade • Earnings Trade to Make: BUY At-‐the-‐money Put Op=ons expiring January 29th.
• Execute trade in the last hour before expected earnings report a\er the market close.
• Close trade one hour a\er the market opens the following trading day.
Two Outcomes to This Trade • Earnings beat expecta0ons…shares jump and lose 100% on put op0on trade.
• Earnings miss, shares fall 15% and gain 200% on put op0on trade.
Wrap-Up • Most traders run from earnings.
• Steps to iden0fy, analyze and make a reasoned earnings trade without having crystal ball.
• Follow our roadmap to trading earnings.
Identify Earnings Stocks • The journey starts here.
Thousands of companies report results. We need a filter to key in on the few companies worthy of making a big gain earnings trade.
• Use the earnings calendar, market narra0ve, and a focus on momentum stocks to iden0fy poten0al earnings trades.
Reading The Charts • Every chart tells a story but are you seeing what's important to making an earnings trade?
• By asking the right ques0ons we can iden0fy inefficiencies that may lead to an earnings trade.
Calculate Fundamentals • Once we have the story of the chart we move on to the numbers.
• Here we learned a simple valua0on technique, The PE Gap, that tells us if a stock is undervalued or overvalued at the 0me earnings are released.
Compare Estimates • To complete our picture we take a deep dive into the es0mates.
• How has the company performed against the number.
• Are es0mates changing?
Get Confirmation • Once we have a general idea of the earnings report to come we get confirma0on of the trade by looking at the headlines and how the stock moves based on those headlines.
Make Your Earnings Trade • All that remains is to make the trade by following our simple earnings trading rules and guidelines.
Are You Ready to Trade Earnings? • With our road map, soon you will trading earnings like a pro instead of running away missing opportunity.
• There really is nothing more rewarding than the rush of reeling in that first big earnings trade.
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