By: Bill Spencer — July 11, 2021
Micro-Cap Monday - Here's 2 Smart Earnings Plays for You
Hello, Bill Spencer here.
Thanks for joining me.
It’s that time again...
And I don’t mean just mean summertime, with its BBQs, trips to the beach… and its face-melting heat and humidity.
(On Saturday, a friend of mine out west said it was 115 in her neck of the woods.)
The time I’m referring to is earnings season, which officially kicks off today.
Although, as micro-cap stocks usually announce earnings later than larger cap stocks, today we don't focus on micro-caps.
But, I’m about to share a powerful investment technique with you.
And, once you understand the concept behind this play, you can use it over and over again… Up to four times a year. Every year.
Plus, I’ll show you two ways to play it, on the bullish side, and the bearish.
No matter what the overall stock market is doing, these plays can produce some awesome results. Fast.
In fact, on Columbus Day last year, and using this technique, I also shared two plays with you.
Had you bought the bullish play on that day, you could’ve made a quick 17%, and in less than three days.
The bearish play performed even better, up 19%, but took a bit longer to play out, about 23 days. Still, that was a pretty awesome gain.
Before I tell you about today’s investment technique, let’s see what happened in the U.S. stock market this week.
The tech heavy Nasdaq composite led the major indices, gaining +0.43%.
It was followed by the S&P 500, which picked up +0.40% on the week.
The third-place gainer was the Dow Jones Industrial Average, up +0.24%.
The small cap S&P 600 Index lost -0.74%. But, the Russell 2000 was the week’s straggler, losing -1.12%.
(Click any image to enlarge)
For a clearer picture of the U.S. stock markets, we turn to the “market internals.”
To do that, we’ve designed a special tool called the US Industry Bell Curve.
This indicator (which you get when you join our data platform, Sector Prophets Pro) shows us which sectors are under the control of the bears, or Supply (the ones colored red), and which are under the control of the bulls, or Demand (those are colored blue).
The image above was generated after the close on Friday, July 9, 2021. You can see that the Curve is nearly awash in red, indicating Supply is in control.
In fact, of the 45 sectors we monitor, the bears control 36 or 80%. The bulls control only nine or 20%. Yet, only two weeks ago, the bulls controlled nearly half of the sectors (46%).
As we've witnessed many times this year, the market is having trouble making up its mind about the direction it wants to take.
But, as promised, today, I’m going to show you a way to profit on both the Supply and Demand side.
As you know, earnings announcements are one of those events that practically everyone follows.
As often as not, following earnings, firms that beat expectations will see their share prices pop.
While firms that disappoint will see their share prices drop.
But here's the thing...
Those post-earnings moves are often short-lived.
If a stock is technically strong... if it's outperforming the market and outperforming its sector peers... and if it's in a strong sector...
Then any post-earnings drop will likely correct itself quickly -- perhaps in a matter of days.
Likewise, if a stock is in a poor sector... and it's getting trounced by its peers and by the wider market...
Then any pop following a strong earnings report will likely prove unsustainable.
Obviously, none of this is cut in stone. We're talking about probability here.
So, with that in mind, here are two stocks — one strong and one weak, both set to report earnings this week.
Expected to report its earnings on Tuesday, July 13, AngioDynamics, Inc (Nasdaq GS: ANGO) is based in Latham, New York. The company designs, manufactures and sells equipment for the treatment of peripheral vascular disease.
It’s a member of the Healthcare sector.
As you can see from this screen cap of the Position Key (a premium tool that comes bundled with Sector Prophets Pro), this stock is...
Arrow #1 and #2 - In a strong sector (Healthcare is ranked #19 of the 45 sectors we monitor).
Arrow #3 - Outperforming the wider market.
In early June, AngioDynamics reported that it received the FDA’s 510(k) nod of approval on its AlphaVac Mechanical Thrombectomy System (non-surgical removal of thrombi or emboli).
Following, the company expects to begin commercial release of that AlphaVac unit sometime in the second half of 2021. That's a bullish horizon event.
Again, on July 13, Wall Street expects AngioDynamics to report improved earnings for its fourth fiscal quarter and year end.
The Street expects earnings will reflect a three cent improvement, or -$(0.03) versus -$(0.06) in AngioDynamics’s 2020 fourth fiscal quarter.
Over the past three quarters, the company consistently beat the Street’s earnings estimates.
Plus, it met the Street’s estimates this time last year.
If AngioDynamics fails to meet expectations in its upcoming earnings report, the stock likely will get punished for it, and take a dive.
Even when companies are known for beating earnings estimates, they can suddenly miss expectations.
We think that if the company fails to meet or beat estimates, any dip in the stock is likely to be short-lived.
Besides, ANGO just made its 52-week high on June 25. That was at $28.30 intraday - the blue arrow.
It closed at $28.11 on Friday, July 9.
If you buy the stock on a dip after the earnings announcement, you stand a good chance of banking a few percentage points in a matter of days or weeks.
You could also buy a Call option on ANGO. We like the Jan 2022 22.50 Strike Call. It has a bid/offer mean of $7.05. Its delta is 79, And it has 196 days to expiration.
We easily found that call option by using another of our Sector Prophet Pro tools, the Options Filter.
When you input the ticker, the filter shows you all the best Puts and Calls for the stock replacement strategy (SRS).
In general, with the SRS you want to find a Call option as close to 180 days until expiration, and with a delta between 75 and 80.
Now let's see how to play earnings from the bearish side.
Citigroup, Inc (NYSE: C) is expected to report its earnings on Wednesday, July 14.
As you can see, instead of showing blue arrows (strength), C’s Position Key shows four red ones. This is a very weak stock in a very weak sector.
Utilizing our Sector Prophets Pro Sector Statuses premium tool, we can take a closer look at C’s sector, Banks.
Arrow #1 - We see that the sector’s Bullish Percent Index is bear confirmed - the weakest possible designation for this indicator.
Arrow #2 - The sector’s Relative Strength (RS) is weak. Its point-and-figure chart is in a descending O’s-column. Its ranked #36 of the 45 sectors we monitor.
Arrow #3 & #4 - Compared to its Peers and the wider Market, C’s RS is weak.
(Interestingly, Citigroup has beaten Wall Street’s earnings estimates over the past four quarters.)
Despite that, in looking at C’s chart, we see a lot of sell side pressure on the stock since early January, and even more since June - the red arrows.
Recently, C dipped below its 50-day Moving Average (the blue line).
On June 18, the stock dipped to $67.13 intraday. And on July 8, it took another dive, this time to open at $66.40 on July 8 - the black arrows.
At that time, C dove down again, and touched its 200-day Moving Average - the red line.
For Citigroup’s July 14 earnings report, some of the Street’s earnings estimates have been increased, and others decreased - more or less a split opinion.
If Citigroup bets estimates and sees a pop, you could short the stock, betting on a quick fall back to Earth... or you could buy Put options.
We like the Oct $75 Strike Puts. The mean bid/offer price is $8.57. The delta is -72 (put deltas are always negative). And the expiration is 98 days out.
Have a great week, my great friend!
Editor-in-Chief, True Market Insiders