Simple Trades, Monster Profits

Module FOUR Earnings Trade Examples

Putting It All Together •  We  have  our  road  map,  our  

execu0on  strategy,  and  our  understanding  of  probabili0es  

•  We  are  armed  with  everything  we  need  to  trade  earnings.  

•  Let’s  go  big  gain  hun0ng  

Earnings Trade Example #1 •  Delta Airlines (DAL): Trading  against  the  grain.  

Identifying Delta Airlines (DAL) •  What  companies  are  repor0ng  week  of  January  18th?  

•  Current  market  narra0ve:  Oil  price  decline,  target  airline  sector.  

•  Delta  Airlines  reports  earnings  January  19th.  

Reviewing the Delta Airlines Chart

What Is The Fundamental-PE Gap? •  Analyze  the  Es0mate  Page.  

•  Obtain  Current  Price,  Current  year  es0mate  and  Next  year  es0mate.  

•  Calculate  the  PE  Gap.  

Get DAL Earnings Estimates •  Current  Year-­‐End  

Earnings  Es0mate  •  Next  Year-­‐End  Earnings  

Es0mate  

Calculate DAL PE Ratio  PE  Ra0o  =  Current  price/Current  year  earnings  es0mate  

DAL PE Ratio = 51.17 / 4.62 = 11

Calculate DAL Profit Growth Rate Profit  growth  rate  =  Next  year  earnings  es0mate/current  year  earnings  es0mate  

DAL Profit growth rate = 6.37 / 4.62 = 38%

Calculate the DAL PE Gap PE  Gap  =  PE  ra0o  -­‐  Profit  growth  rate  

DAL PE Gap = 11-38 = -27 Delta Airlines (DAL) is Undervalued

Successive Earnings Beats •  Delta Airlines

(DAL): 4  Straight  Quarters  Bea0ng  the  Number.  

Earnings Per Share Trend Increasing…

How Do Estimates Conform? •  Share  price  movements  down.  

•  Analyst  Es0mates  rising.  

Delta Confirmation •  Most  recent  headlines  have  pressured  Delta  shares.  •  Low-­‐priced  compe00on…  •  Pilots  demanding  higher  wages.  •  Poor  weather…  •  Selling  enhances  earnings  trading  opportunity.  •  Disconnect  between  chart  and  PE  Gap  suggests  Call  op0ons  for  Earnings  Players.  

Delta Earnings Trade Summary •  Sideways  moving  stock…  •  Strong  profit  growth…  •  History  of  bea0ng  the  number…  

•  Posi0ve  es0mates…  •  Doesn’t  conform  to  nega0ve  market  narra0ve…  

The Delta (DAL) Earnings Trade •  Earnings  Trade  to  Make:    BUY  At-­‐the-­‐money  Call  Op=ons  expiring  January  22nd.  

•  Execute  trade  in  the  last  hour  before  expected  earnings  report  a\er  the  market  close.  

•  Close  trade  one  hour  a\er  the  market  opens  the  following  trading  day.  

Two Outcomes •  Earnings  miss  and  stock  moves  lower  -­‐  100%  loss  on  our  call  

op0on.  •  Earnings  beat  and  stock  rises…poten0al  600%  gain  on  our  call  

op0on  with  a  10%  gain  on  the  stock.  

Earnings Trade Example #2: •  GoPro Inc: (GPRO):  The  Ul0mate  in  a  “News”  Stock.  

Identifying GPRO •  What  companies  are  repor0ng  earnings  the  week  of  January  25th?  

•  GoPro  is  a  “momentum”  stock  repor0ng  on  January  26th.  – Busted  IPO…the  “one  trick  pony”  product?  –  Is  it  a  fad,  a  tech  stock  or  media  company?  – Shares  heavily  shorted.  

Look at the GPRO Chart

Fundamentals With PE Gap GPRO  Current  Year  Es0mates   GPRO  Next  Year  Es0mates  

Calculate GPRO PE Ratio  PE  Ra0o  =  Current  price/Current  year  earnings  

GPRO PE Ratio = 18.88 / 1.17 = 16

Calculate GPRO Profit Growth Rate Profit  growth  rate  =  Next  year  earnings  es0mate/current  year  earnings  es0mate  

GPRO Profit growth rate = 1.18 / 1.17 = 1%  

Calculate the GPRO PE Gap PE  Gap  =  PE  ra0o  -­‐  Profit  growth  rate GPRO PE Gap = 16 – 1 = 15 GoPro Inc. (GPRO) is Overvalued

GPRO Estimates •  GoPro  missed  es0mates  last  quarter.  

GPRO Estimates Slashed •  $1.17  versus  $1.74  profit  90  days  prior.  •  Did  the  cuts  in  es0mates  go  far  enough?  

GPRO Confirmation •  Holiday  season…dud  or  must  have  gi\?  •  Slow  to  realize  the  fad  nature  of  GPRO?  •  Company  facing  increased  compe00on.  •  Apple  threat.  

GoPro Earnings Trade Summary •  Busted  IPO  breaks  key  price  levels.  

•  Stock  remains  overvalued…  •  Analysts  es0mates  s0ll  too  high,  

•  Current  nega0ve  headlines  result  stock  moving  higher.  

The GoPro (GPRO) Earnings Trade •  Earnings  Trade  to  Make:    BUY  At-­‐the-­‐money  Put  Op=ons  expiring  January  29th.  

•  Execute  trade  in  the  last  hour  before  expected  earnings  report  a\er  the  market  close.  

•  Close  trade  one  hour  a\er  the  market  opens  the  following  trading  day.  

Two Outcomes to This Trade •  Earnings  beat  expecta0ons…shares  jump  and  lose  100%  on  put  op0on  trade.  

•  Earnings  miss,  shares  fall  15%  and  gain  200%  on  put  op0on  trade.  

Wrap-Up •  Most  traders  run  from  earnings.    

•  Steps  to  iden0fy,  analyze  and  make  a  reasoned  earnings  trade  without  having  crystal  ball.  

•  Follow  our  roadmap  to  trading  earnings.  

Identify Earnings Stocks •  The  journey  starts  here.  

Thousands  of  companies  report  results.  We  need  a  filter  to  key  in  on  the  few  companies  worthy  of  making  a  big  gain  earnings  trade.  

•  Use  the  earnings  calendar,  market  narra0ve,  and  a  focus  on  momentum  stocks  to  iden0fy  poten0al  earnings  trades.  

Reading The Charts •  Every  chart  tells  a  story  but  are  you  seeing  what's  important  to  making  an  earnings  trade?  

•  By  asking  the  right  ques0ons  we  can  iden0fy  inefficiencies  that  may  lead  to  an  earnings  trade.  

Calculate Fundamentals •  Once  we  have  the  story  of  the  chart  we  move  on  to  the  numbers.  

•  Here  we  learned  a  simple  valua0on  technique,  The  PE  Gap,  that  tells  us  if  a  stock  is  undervalued  or  overvalued  at  the  0me  earnings  are  released.  

Compare Estimates •  To  complete  our  picture  we  take  a  deep  dive  into  the  es0mates.  

•  How  has  the  company  performed  against  the  number.  

•  Are  es0mates  changing?  

Get Confirmation •  Once  we  have  a  general  idea  of  the  earnings  report  to  come  we  get  confirma0on  of  the  trade  by  looking  at  the  headlines  and  how  the  stock  moves  based  on  those  headlines.  

Make Your Earnings Trade •  All  that  remains  is  to  make  the  trade  by  following  our  simple  earnings  trading  rules  and  guidelines.  

Are You Ready to Trade Earnings? •  With  our  road  map,  soon  you  will  trading  earnings  like  a  pro  instead  of  running  away  missing  opportunity.  

•  There  really  is  nothing  more  rewarding  than  the  rush  of  reeling  in  that  first  big  earnings  trade.