Trade Alert: Earnings, 12/7/2023

Deviating from our formula with a bearish bet today.

The Gaps In Our Composite Score

In the recap of our current approach below, you’ll see the ten signals we use when evaluating earnings trades. Not all of these signals impact our composite scores though, because we don’t have enough actual returns data on all of them. That’s the case with today’s bearish bet, as you’ll see below.

Our Current Approach

Recall that we’re using these ten signals 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 Bearish On

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

Bearish Stock #1 (4.9)

1. Social data: -13.

2. PA Options sentiment: Very Bearish.

3. Setup rating: 5

4. Valuation rating: 3

5. F-Score: 6

6. Recent insider transaction(s): Net open market purchases in September, but at less than a third of the current share price.

7. Zacks ESP: 0%

8. Zacks Ranking: 3

9. RSI: 81

10. Short Interest: 18.99%

The composite score here is bullish, so let me explain why I’m bearish on this stock. The recent insider transaction contributes 2.8 points to the 4.9 point composite score because, in our data, the average stock with net insider buying out performs the average stock without it by 2.8x during earnings week. But we have a relatively small sample of stocks with net insider buying, and in this case, the stock has climbed more than 200% since the insider bought his shares in September.

Also, I would consider an RSI of 81 to be very bearish (since it suggests the stock is overbought), but it doesn’t impact our composite score here because we have never had a stock with an RSI that high before earnings. So based on all of that, I am betting against this stock, despite its high composite score.

Details below.

Bearish Trade #1