Wall Street had a scare last week the culminated in a very red Monday. Stocks fell out of bed as investors panicked. There wasn’t one particular trigger for it, just simple jitters. In the last two days, stocks bounced ferociously and we are almost threatening to set new highs. It is that time of year where there are stocks to trade after the earnings events. So, in this article, we will pick three.
It’s hard to have strong conviction in buying dips when the whole market is this high. We haven’t had a real correction in a very long time. The S&P 500 daily chart shows how consistent the bulls have been. Every small dip brought out buyers in force. They not only averted damage, but every time set new records thereafter. This cannot continue forever — but for now, it’s working.
Largely, this is due to the artificial tailwinds from the government. The Federal Reserve is still bullish since December of 2018. On the other hand, the White House is throwing trillions of dollars at the problem. Most recently, they launched new large stimulus program targeting parents.
They say you can’t fight the tape, and you can’t fight the fed. Those two have never been stronger in all of history. Shorting markets right here just because they are high is wrong. On the other hand, using caution is right. So far, the scorecards have shown very little weakness. The reactions after the headlines are from wrong expectations. It’s easy to get overly excited about the prospects of something. Then, reality fails to live up to the high bar.
So, with all of that in mind, here are three stocks to trade after their earnings.
Now, let’s dive in and take a closer look a each one.
Stocks to Trade After Earnings: Netflix (NFLX)
Netflix is the first FAANG gang member to report, and it usually sets the tone for the rest. The results were not that bad, yet the knee-jerk reaction was a mini flash crash. After hours, Netflix stock fell to $496 per share on the headline. They recovered the next day but still had a down 3% day.
Overall, there was nothing bad about the report, and the business is still strong. They are delivering very strong growth without bleeding cash. The old criticism was that they needed to constantly borrow to sustain their spending. That has changed because they now have positive cash flow from operations. Moreover their price-sales is 9.2, which is just above Apple (NASDAQ:AAPL) and about half of Tesla (NASDAQ:TSLA).
Clearly, this is not the expensive company it used to be. Management has earned its stripes and has navigated through tough times. I am confident that they know what they’re doing, and they are executing well. There’s also the possibility of adding new revenue streams, and having a better financial position could make that happen. Gaming services are big businesses and growing. User profile have evolved to involve wider audiences and age groups are gamers now. Therefore, dips in NFLX stock are buying opportunities.
International Business Machines (IBM)
I haven’t been a fan of IBM for a long time. I expressed that opinion even when I wrote about upside opportunities about it. The company has so far failed to steer the ship into the new tech era. Management has been promising great things for so long, and not much to show for. I was hoping that the recent CEO change would hit the reset button. But it seems that’s it’s more of the same.
I am amazed that the board has turned over the whole executive team. Their tolerance of lackluster results is high. Don’t take my word for it, just look at the scoreboard. IBM stock is at the same level from 1999. They have made no progress in 22 years. In contrast, Microsoft (NASDAQ:MSFT) is up 520% since then. They both had sluggish management, but Microsoft rectified that problem. Thus, leadership matters, and IBM needs to recognize it.
Until then, I am willing to trade it tactically. This means that I would be willing to be long from support. Value is not the reason to buy IBM stock on dips. Besides, it hasn’t had much of a correction from the earnings report. My strategy would be to wait to see how it does going into $144 per share. I bet there are sellers lurking there. If that’s the case then it would be at risk of losing $136. When that happens, the opportunity is to buy the IBM dip under $130 for share.
The business is not horrific, yet I don’t believe in the company long term. The stock is cheap, but for good reason. Therefore, I must only consider trading it in the short term. I am not one wanting to buy and hold for 22 years and still see no upside. This is a new era of investing, and it’s a lot faster than what it used to be.
Stocks to Trade After Earnings: Harley Davidson (HOG)
I haven’t written about HOG stock in a long while. They reported earnings this week, and the reaction was negative. The stock fell 7% on Wednesday. What makes it worse is that it did so on a very bullish day in the market. The report card itself wasn’t terrible. Once again, it’s the expectations that were out of whack. The financial metrics are not that exciting to begin with. Therefore, investors need to see and hear a little bit extra to buy it. They did not get it so they threw a fit.
Total revenue is still considerably lower than what it used to be pre-pandemic. I’m willing to give them leeway on that because retail has not yet fully recovered. It is amazing that they managed to remain profitable throughout the ordeal. The trailing 12 months net income is back to levels from before the virus. For that reason, Harley-Davidson belongs in the batch of stocks to trade after the earnings.
The drop was big yesterday, and it could continue a bit longer. Technically, HOG has support at $39 per share. But it is entirely possible for it to overshoot $2 lower. For the long term this won’t make a big difference. What is important, however, is to stay small while adding shares. The current stock market altitude worries me a bit. If we finally get a correction, it will take all stocks down regardless of support or value.
Collectively, patience is key, also using other tricks in options could help. Instead of buying shares at $40, I could sell puts much lower. This would make me long on HOG stock while leaving a big margin for error.
In closing, I should remind everyone that we don’t know what pieces of the puzzle we are missing. These circumstances have never happened before, and those in charge are experimenting. Most experts who claim to be that are not. When we are in uncharted waters, we should all doubt our conviction a little bit extra.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the biedexmarkets.com.com Publishing Guidelines.
Nicolas Chahine is the managing director of SellSpreads.com.