The Perplexity of Earnings

GOOG, CAT, & SNDK Highlight Today’s Down-Move

By Bryan Bottarelli
Friday, July 20, 2007 12:21 PM EDT
Fri, 20 Jul 2007 16:21:00 GMT

Dear Bottarelli Research Member,

There’s a very good chance that we could be seeing a “Downside Gift Gap” in shares of Caterpillar (CAT – NYSE). As you can see from the chart below, the stock is down over $8.00 after reporting Q2 profits that fell 21% over last year’s quarter — and this down-move is putting a big dent in the Dow. Combine that with Google’s (GOOG – NASDAQ) $30 haircut and both the Dow and NASDAQ are deeply in the red today. I personally think this could another one-time drop that serves as a great buying opportunity next week, but more on that thought in a moment.

Back to CAT. The last time CAT fell hard on an earnings release, the stock moved even lower in the weeks that followed — but then mounted a strong recovery that eventually recovered all of the losses and set new 52-week highs. The $77.00 level served as the last two support points, so let’s see how the stock responds to this level. If this level holds, then we could have a great opportunity for a longer-dated call play. So stay tuned.

CAT

Another interesting event (at least to me) is how incredibly perplexing today’s earnings are on stock prices. Take Google (GOOG – NASDAQ) for example. The company reported a 28% gain in earnings for the June quarter — and witnessed a revenue jump of 57% from the same period last year. But these results disappointed Wall Street and the stock is down over $30.00.

GOOG

Now let’s look at SanDisk (SNDK – NASDAQ). The company reported that Q2 profit fell 70% from last year, as deteriorating flash memory prices ate away at profits. But since the company “sounded bullish” about prices and demand looking ahead, the stock rose 4% in early trading.

SNDK

So what you have is a company like GOOG exceeding last quarter’s numbers (but falling short of expectations) — which leads to GOOG shares getting pummeled. At the same time, you also have a company like SNDK falling well short of last quarter’s numbers (but exceeding expectations) — which leads to SNDK shares rocking. Confused yet? It just goes to show you, there is no logical way to play earnings — and this is a clear illustration of why I like to play stocks leading up to their earnings release.

After all, the one thing that was consistent with GOOG and SNDK in the weeks leading up to their earnings dates was that each stock was moving higher in anticipation of the numbers. So in my view, the best tactic is to play these moves via options leading up to the announcements — and them take profits a day or two prior to the actual announcement. That way, you mitigate the directional risk and walk away safe with a nice profit in hand.

Now, as I look at today’s action, the downside move certainly supports out position on Public Storage (PSA – NYSE). The PSA August 80 Puts (PSA TP) that we entered for $5.10 have now traded for $5.30, so continue to hold this position as PSA looks to set new lows.

PSA

Also maintain your AGU August 45 Calls and your TIE August 35 Calls (TIE HG). Like I mentioned above, I feel today’s down-move is a one-time reaction to GOOG and CAT earnings, and next week we could see the markets recover like they have many times in the past. So let’s maintain our balance of calls and puts to capture any market direction. Next week, I expect to move on some great call-buying opportunities (notable examples include DRYS, PH, CMI, PCP, and possibly GS and X).

Unless something comes up intra-day, we’ll speak again next week. And on a personal note, a wedding this weekend in New Jersey means that I won’t get back into the office until late-afternoon on Monday, so you can realistically expect to kick-start our next series of trades on Tuesday. Until then, have a good weekend. And as always…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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