Trade Alert: 2/5/2024

After exiting Friday's trade for a 138% gain, we're entering a bullish bet on a company in the same industry reporting tomorrow.

Note: In our trade alert on Friday, we wrote: 

Note: we’ve had five profitable exits on earnings trades so far this week, ranging from 14% to 127%, (a sixth trade looks like it’s going to be a loss). The one below has metrics closest to that of our triple-digit gainer from this week. Hopefully it performs similarly.

That "one below" was Estée Lauder (EL 1.57%↑), which spiked today on its earnings beat and job cuts news, and we just exited our trade on it for a 138% gain. Today’s trade is on a stock in the same industry.

Our Current Approach

Recall that we’re using these ten factors when evaluating earnings trades,

• LikeFolio’s earnings score based on social data. The higher the number, the more bullish, the lower (more negative) the number, the more bearish.

• Portfolio Armor’s gauge of options market sentiment.

• Chartmill’s Setup rating. On a scale of 0-10, this is a measure of technical consolidation. For bullish trades, we want a high setup rating; for bearish trades, a lower one.

• Chartmill’s Valuation rating. On a scale of 0-10, this is a measure of fundamental valuation incorporating common rations like P/E, PEG, EBITDA/Enterprise Value, etc. For bullish trades, the higher the better the Valuation rating the better; for bearish trades, the reverse.

• Zacks Earnings ESP (Expected Surprise Prediction). This is a ratio of the most accurate analyst’s earnings estimate versus the consensus estimate.

• Zacks Ranking. This goes from 1 to 5, with #1 ranked stocks being their most bullish ones. They grade on a bell curve, so most stocks we see end up with their #3 (neutral) ranking.

• The Piotroski F-Score. A measure of financial strength on a scale from 0-9, with 9 being best.

• Recent insider transactions.

• RSI (Relative Strength Index). A technical measure of whether a stock is overbought or oversold. We’re looking for RSI levels below 70 for bullish trades and above 30 for bearish ones.

• Short Interest.

And we’re keeping track of each metric on a range from very bearish to very bullish, and tracking them and their performance in a spreadsheet, a snippet of which is below.

And we’re using their relative outperformance or underperformance versus all of the stocks that we’ve analyzed to adjust our weightings of each metric to determine which stocks we should be bullish or bearish on ahead of earnings.

The Stock We’re Bullish On

The number in parentheses represents our composite score for a stock, based on all the metrics: higher = more bullish, and lower (more negative) = more bearish.

Bullish Stock #1 (3.9)

1. Social data: +49

2. PA Options sentiment: Very Bullish.

3. Setup rating: 3

4. Valuation rating: 4

5. F-Score: 6

6. Recent insider transaction(s): Net open market sales every month, peaking last July.

7. Zacks ESP: -1.02%

8. Zacks Ranking: 3

9. RSI: 70

10. Short Interest: 6.12%

Details below.

Bullish Trade #1

Note: I placed this trade before the stock reversed this morning, so consider entering Bullish Trade #2 instead.

The stock is ELF Beauty (EL 0.00%↑), and our trade is a vertical spread expiring on February 9th, buying the $172.50 strike calls and selling the $175 strike calls for a net debit of $0.90. The max gain on 4 contracts is $640, the max loss is $360, and the break even is with EL at $173.40. This trade filled at $0.90.

Bullish Trade #2

The stock is ELF Beauty (EL 0.00%↑), and our trade is a vertical spread expiring on February 9th, buying the $162.50 strike calls and selling the $165 strike calls for a net debit of $1.10. The max gain on 3 contracts is $420, the max loss is $330, and the break even is with ELF trading at $163.60. This trade hasn’t filled yet. This one filled at $1.10.

Exiting These Trades

I’m going to set a GTC order to exit at about 90% to 95% of the spread and lower the price if necessary as we approach expiration.