Trade Alert: Earnings, 12/20/2023

Two bullish trades on stocks reporting tomorrow.

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 Stocks 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 (2.4)

1. Social data: +23.

2. PA Options sentiment: Very Bullish.

3. Setup rating: 3

4. Valuation rating: 2

5. F-Score: 5

6. Recent insider transaction(s): Net open market sales, peaking and ending in July.

7. Zacks ESP: -25.91%

8. Zacks Ranking: 3

9. RSI: 72

10. Short Interest: 12.18%

One note about #7: I characterized that Zacks ESP as “very bearish”, but according to our spreadsheet, stocks with very bearish Zacks ESP scores don’t perform much differently than average: the average 5-day return for them is 5.17%, versus 5.23% for all of the stocks in our sample. So that didn’t impact our composite score here (Counterintuitively, stocks with "bearish” Zacks ESPs have done significantly worse than ones with “very bearish” ones, but that may be partly a function of us having fewer “very bearish” examples).

Bullish Stock #2 (3.4)

1. Social data: +31

2. PA Options sentiment: Bullish.

3. Setup rating: 3

4. Valuation rating: 2

5. F-Score: 7

6. Recent insider transaction(s): Net open market sales as recently as December, but a large open market purchase in October.

7. Zacks ESP: 0%

8. Zacks Ranking: 3

9. RSI: 78

10. Short Interest: 1.26%

Details below.

Bullish Trade #1