Tonight actually offers one of the more intriguing earnings lineups, in my view. It presents a nice cross-section of the market. I don't believe we'll see a name dominate the headlines tonight or tomorrow morning, but we'll have plenty that get discussed.
We have TripAdvisor (TRIP) reporting after today's disappointment from Priceline (PCLN). Tesla Motors (TSLA) is always fascinating. The market gets a better view on the value per car sold, which is always worth a chuckle. Whole Foods (WFM) will provide an update on its attempt to right the ship. Side note: Watch that $28 level. It's been the anchor on this one lately. Tomorrow morning, Alibaba (BABA) will glean a look at China as well. For now, I'm only looking at a few of tonight's reports.
I don't often post these regression analyst (RA) charts, as I normally stick with the familiar price charts, but I've found them extremely helpful this earnings season. Nothing around earnings is perfectly accurate, but the more information a trade holds, the better decision investors can make both into and after earnings.
Tesla will likely garner the most attention tonight. While the chart is rolling over, if we look at expectations compared to past results, we don't find much out of the ordinary. While the low R-squared results support the idea of difficult pricing and volatility into earnings, I would note the current projection of the linear best fit gives us an expectation for a move around 8%. Options are currently pricing a move around 8.7%, so these two are fairly close. The results are pulled a bit by two of the most three recent reports, but given they are recent, they should be weighted a bit heavier. Tesla only saw a significant move above current expectations last November and it was to the upside. We did see another 11% move back in May 2014 to the downside. What this tells me here is selling volatility could work well, but only if a trader is willing to price that sale at a move greater than 9 or 10%.
TRIP has a similar look to TSLA in terms of expectations. Our best fit lines up well with the current options expectations for a move around 11%. The difference here is the R-squared. In TRIP's case, it is near zero, which basically indicates this one is the truest of the true when it comes to lottery tickets. The 11% guess is completely based on the unknown. Pricing here has to be done in such a fashion where a market maker can't be completely ruined on a big move, but not so high everyone will rush to sell volatility. This is the kind of regression analysis that indicates you should avoid the stock into earnings. Period. If you find yourself in a position where you have to scratch the itch, then calendar spreads pricing a 5% move or a trade that targets a 13%-15% move -- i.e., a lottery ticket -- are the only trades that even sniff the radar. I prefer to avoid this one, but it's not me pressing the buy or sell button on your screen.
I've been bearish on Whole Foods for many months. I would love to see something in the report to change my mind. The stock sits with a P/E of 19 while we saw The Fresh Market (TFM) get scooped up for a P/E in the low 20s and Sprouts Farmers Market (SFM) traded with a forward P/E of 24, but with much better growth projection vs. Whole Foods' 18, I can't say WFM is cheap here. At least I can't unless they show me something tonight. This is a very interesting RA into earnings, though, as the R-Squared of 0.51 is much higher than many names I've looked at recently. Options are pricing a move of nearly 10% into tonight's report, but even the biggest moves over the past six reports topped out in the 10%-12% range. In fact, we've been trending down recently. Perhaps it is the depressed stock price, the 12% short interest or the worry of a whoosh lower should we break below $28, but based on the RA picture here, options look grossly overpriced. While I believe in avoiding unlimited risk in shorting options, this is another one where iron condors or diagonal spreads look attractive. I might be as tight as 5% here looking for a bigger payout.