simple trades, monster profitstrades... · 2016-01-27 · simple trades, monster profits module...
TRANSCRIPT
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Simple Trades, Monster Profits
Module FOUR Earnings Trade Examples
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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
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Earnings Trade Example #1 • Delta Airlines (DAL): Trading against the grain.
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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.
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Reviewing the Delta Airlines Chart
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What Is The Fundamental-PE Gap? • Analyze the Es0mate Page.
• Obtain Current Price, Current year es0mate and Next year es0mate.
• Calculate the PE Gap.
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Get DAL Earnings Estimates • Current Year-‐End
Earnings Es0mate • Next Year-‐End Earnings
Es0mate
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Calculate DAL PE Ratio PE Ra0o = Current price/Current year earnings es0mate
DAL PE Ratio = 51.17 / 4.62 = 11
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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%
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Calculate the DAL PE Gap PE Gap = PE ra0o -‐ Profit growth rate
DAL PE Gap = 11-38 = -27 Delta Airlines (DAL) is Undervalued
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Successive Earnings Beats • Delta Airlines
(DAL): 4 Straight Quarters Bea0ng the Number.
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Earnings Per Share Trend Increasing…
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How Do Estimates Conform? • Share price movements down.
• Analyst Es0mates rising.
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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.
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Delta Earnings Trade Summary • Sideways moving stock… • Strong profit growth… • History of bea0ng the number…
• Posi0ve es0mates… • Doesn’t conform to nega0ve market narra0ve…
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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.
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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.
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Earnings Trade Example #2: • GoPro Inc: (GPRO): The Ul0mate in a “News” Stock.
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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.
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Look at the GPRO Chart
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Fundamentals With PE Gap GPRO Current Year Es0mates GPRO Next Year Es0mates
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Calculate GPRO PE Ratio PE Ra0o = Current price/Current year earnings
GPRO PE Ratio = 18.88 / 1.17 = 16
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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%
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Calculate the GPRO PE Gap PE Gap = PE ra0o -‐ Profit growth rate GPRO PE Gap = 16 – 1 = 15 GoPro Inc. (GPRO) is Overvalued
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GPRO Estimates • GoPro missed es0mates last quarter.
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GPRO Estimates Slashed • $1.17 versus $1.74 profit 90 days prior. • Did the cuts in es0mates go far enough?
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GPRO Confirmation • Holiday season…dud or must have gi\? • Slow to realize the fad nature of GPRO? • Company facing increased compe00on. • Apple threat.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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?
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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.
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Make Your Earnings Trade • All that remains is to make the trade by following our simple earnings trading rules and guidelines.
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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.