Predicting Earnings Patterns

 | May 12, 2014 | 2:00 PM EDT  | Comments
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Stock quotes in this article:

wmt

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csco

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rax

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amzn

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call

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hmin

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trak

Earnings season is finally winding down.

Of those reporting this week, only Wal-Mart (WMT) and Cisco Systems (CSCO) top $100 billion in market cap. In fact, no other company with more than a $40 billion in market cap is reporting. Next week, we drop to one name with more than $100 billion in market cap reporting.

My focus this earnings season has been to study the past to make predictions about the future. While charts and patterns may only tell us where we've been according to some, the future does tend to rhyme with history, so we have a better idea of what the future might say by conducting such studies. So, I am going to make some observations for expectations on several names reporting before tomorrow's trading kicks into gear.

Rackspace Hosting (RAX) has faced challenges from many names in the space, none bigger than Amazon (AMZN) at the moment. The stock has already lost a third of its value this year, but that doesn't make it a sure-fire bounce play here. Straddles are pricing in a move just below 12%. This is consistent with the last three reports where straddles have been pricing in a move between 11% and 13%. While the stock has been all over on the past four reports, closing down some 20% two times, there were also two instances where it closed slightly below the straddle pricing. But overall, the stock's intraday movement has exceeded the straddle pricing every time during the last four reports. Furthermore, the stock closed below the open the last four reports. Down openings have resulted in lower closes as well and the last three times the stock opened lower. The strategies that worked the best were buying straddles, fading the stock the at the open or selling iron condors for a debit (rather than buying them for a net credit).

Another name with a similar result is magicJack VocalTec (CALL). This stock, and its 38% short interest has been feast or famine for straddle buyers. The last two reports, the stock has been a huge mover during the day, trading well outside the range of the straddles. Unfortunately, last August was a painful reaction for straddle buyers. But this is another name that has faded from open to close down four reports in a row, so a short is possible, especially if the stock is 5% higher from the open. One could work a follow-through trade in either direction as long as trails were in place. The stock has continued the trend from the open for at least 5% at one point during the trading day. In other words, if it opened up then the stock's high for the day was at least 5% higher and the flip side is true if it opened down (a low that was 5% below the open). Certainly a trend worth considering.

Homes Inn & Hotel Management (HMIN) isn't quite as exciting, but this has been another follow-through type of name. The stock has moved an additional 8%+ in the direction of the open on three of the past four reports and there wasn't too much pain for the report where this did not occur.

Last is Dealertrack Holding (TRAK), where buying the open and selling the close has worked well three of the past four times. It worked well enough that the one miss doesn't come close to erasing the gains on the other three trades. The straddle is a bit tougher, but has averaged a 12% gain the last three reports. The issue here is liquidity and strike prices. We are just too far from the $45 strike to make this one a viable strategy in my view.

My focus here is on RAX ahead of earnings, but I'm certainly going to be watching all four after their earnings tomorrow.

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