Earning season can always be expected to bring a rise in volatility. But at a time when stock markets seem to be pricing in perfection, a poor earnings announcement or guidance can stop a stock’s momentum in its tracks. Whether you look at the stock market’s high CAPE ratio, the time since we have seen a correction, or extreme bullish sentiment, it is easy to see that investors have high expectations.
This creates a potential for large moves in a stock’s price after an earnings announcement. Results below expectations can give a harsh reality check for investors who had been expecting greatness. Meanwhile, a blowout earnings announcement can lead to capitulation by bears and send a stock soaring.
As we get into a busy week of earnings announcements, here’s a look at some companies that report earnings this week that investors expect to be volatile after the earnings announcement.
For all of the stocks below, implied volatility is calculated from the nearest at the money call option. Implied price move is calculated by taking the stock’s current price multiplied by implied volatility and the square root of the number of days before option expiration divided by 365.
Netflix Inc. (NFLX, Financial)
- Earnings Date: Monday, Jan. 22 – after market close
- Analyst EPS Estimates: 41 cents
- Implied Volatility: 82.67%
- Implied Price Move: +/- $21.33, or 9.68%
Netflix has always been a volatile stock around earnings season, and traders expect this quarter to be no different.
Netflix has been rapidly taking on debt to create content for its platform. So far, it has not produced a corresponding rise in operating income for the company.
While investors have been happy to give up current earnings for future prospects of growth, it remains unproven that a large increase in spending by Netflix will bring an equivalent rise in revenue.
Currently, the company is valued at pretty extreme levels. It is priced at more than nine times annual sales, has a price-earnings (P/E) ratio of more than 200, and has expectations of 50% growth in next year’s earnings.
Investors should expect some nervousness if revenue or subscriber growth shows signs of slowing, while the company’s debt payments continue to rise.
Capital One Financial Corp. (COF, Financial)
- Earnings Date: Tuesday, Jan. 23 – after market close
- Analyst Estimates: $1.85
- Implied Volatility: 43.57%
- Implied Price Move: +/- $5.32, or 5.1%
Shares of Capital One are on fire lately, up nearly 180% from their January 2016 lows:
However, their primary business of credit card loans has shown weakness as of late.
Capital One has seen a decline in the performance of its credit card loans. November saw charge-offs rise to 5.16%, up from 4.7% the month before.
Nationwide credit card debt is on pace to top $1 trillion in 2018, making many investors nervous that the American consumer is overextended. Increased debt, along with rising interest rates could put additional strain on the average American consumer. Further increases in loan defaults could be an early warning sign that consumers are tapped out.
Investors will be actively looking for guidance on the performance of Capital One’s loans to determine if the trend of souring credit card loans continued.
United Continental Holdings Inc. (UAL, Financial)
- Earnings Date: Tuesday, Jan. 23 – after market close
- Analyst Estimates: $1.34
- Implied Volatility: 47.44%
- Implied Price Move: +/- $4.25, or 5.55%
Airlines have been a primary benefactor of low oil prices and a strong U.S. economy.
But the industry may be facing headwinds. Oil prices are up more than 50% since July, a move that has historically led to pressure on United Continental’s share price. However, the last few months have seen a rise in both oil and the company’s share price.
However, if the company keeps performing as strong as it has, it may be able to weather the recent increase in oil prices. At current estimates, United Continental trades at a price-earnings ratio of just 10, leaving plenty of room for multiple expansion even if earnings growth slows due to rising costs.
Investors will be looking for management’s forecast on how future oil prices will affect earnings, and if the rise of United’s lower cost competitors is starting to affect its pricing power.
General Electric Co. (GE, Financial)
- Earnings Date: Wednesday, Jan. 24 – before market open
- Analyst Estimates: 28 cents
- Implied Volatility: 58.58%
- Implied Price Move: +/- $1.11, or 6.86%
Are the worst of GE’s troubles finally behind it? After a terrible 2017, GE’s stock is down nearly 50% from where it was just 18 months ago, and almost exactly where it was 20 years ago:
There are a lot of moving parts at GE today. Here are a few items that investors will be looking at:
- Guidance on its legacy finance and insurance operations. Just last week GE announced a $6.2 billion charge due to its legacy insurance operations. Some fear it may just be the beginning of required write-downs. On top of that, earnings have been hit as GE winds down GE Capital to focus more on its industrial side. Will GE’s struggling industrial operations be enough to maintain its already reduced dividend?
- News about a breakup of the company. Just last week news of a potential breakup of the industrial giant surfaced. A breakup may unlock value in the company, or it could result in lost synergy between its operating units. Investors will be anxiously listening to see if news of a potential breakup is brought up on the earnings call.
If management can convince investors that the company has moved past its recent struggles, investors may begin to see GE’s stock as a bargain. Analysts have punished the stock and pushed down earnings estimates. If GE is able to create growth in earnings from its industrial side, GE may be looking at a price-earnings ratio around 15. And with a dividend yield just under 3%, patient investors could be rewarded.
Caterpillar Inc. (CAT, Financial)
- Earnings Date: Thursday, Jan. 25 – before market open
- Analyst Estimates: $1.77
- Implied Volatility: 48.14%
- Implied Price Move: +/- $9.60, or 5.63%
Caterpillar has been another primary benefactor of the strong global economy. Investors have seen Caterpillar’s share price rise more than 250% over the last two years:
Investors and management have high expectations for Caterpillar’s operations. The company increased its guidance last quarter to $4.60 in earnings for fiscal year 2017, giving the company a price-earnings ratio of 39 based on today’s price.
But analysts and investors are expecting the momentum to continue, with estimates for 2018 currently at $8.13, almost double Caterpillar’s expected earnings this year.
Based on the rising share price, there are very high expectations baked into Caterpillar’s stock. Investors will be carefully listening to management during this week’s conference call to make sure the growth is on pace to continue.
Freeport-McMoRan Inc. (FCX, Financial)
- Earnings Date: Thursday, Jan. 25 – before market open
- Analyst Estimates: 49 cents
- Implied Volatility: 71.2%
- Implied Price Move: +/- $1.66, or 8.33%
Freeport-McMoRan is benefiting from the rebound in commodity prices and increases in global growth, particularly strong demand from China.
And investors have taken note. The stock is up nearly 400% over the last two years:
Is Freeport priced for perfection? The recent rise in share price gives the company a price earnings ratio approaching 30, but analysts expect earnings to grow rapidly. At current estimates for $1.80 per share in earnings for 2018, Freeport-McMoRan has a forward price-earnings ratio of just 11.
If management’s guidance for earnings growth and demand are strong, Freeport-McMoRan’s shares look cheap relative to the rest of the market.
- Earnings Date: Thursday, Jan. 25 – before market open
- Analyst Estimates: 86 cents
- Implied Volatility: 47.0%
- Implied Price Move: +/- $2.47, or 5.50%
Intel’s stock price has been recently hit by the Spectre and Meltdown security flaws. Initially, shares dropped 10% on the news, but they have regained about half of their loss since the announcement.
Investors will be looking for guidance on costs associated with the chip flaws, along with any new news on the issue.
Also, it is expected that Intel will increase its dividend this quarter, but questions still remain how expensive Intel’s fix for the recently discovered problems will be, and if it will have any long-term effect on sales.
Intel represents one of the few sources of value in the expensive tech sector. Intel’s price-earnings ratio based on current year estimates is 14.2, and the company has been a consistent dividend payer and raiser, with a current yield of 2.4%.
Disclosure: I have no ownership in any of the stocks discussed in this article.
