Earnings season keeps rolling on, and everyone's playing the usual "earnings estimates beats/misses" game, which often falls into the realm of unfulfilled prophecies, as analysts get over-excited or overly pessimistic. Check out how wrong analysts have been on Caterpillar (NYSE:CAT), over the last four quarters:
Maybe CAT is a special case? Nope, analysts were even more clueless about Boeing, (NYSE:BA). Imagine if you submitted an estimate to your boss that was off by over -80% - Do you think it might prompt a demotion or even a pink slip? But not on Wall Street - where being consistently and often egregiously wrong is OK. Why? Because it fosters the trading excitement of "Earnings Beats and Misses":
How about just looking at what companies actually earned vs. a year ago?
And also looking at revenue growth vs. a year ago:
CAT has been one of the best stocks to buy in 2012 for price gains, but BA shares haven't performed nearly as well.
Here's one reason why: BA is actually forecasting lower 2012 earnings per share, of $4.05 to $4.25, vs. 2011's $5.33 EPS, while CAT is forecasting continued strong growth.
Even though BA has a record order backlog, unlike other companies, they can't rush highly technical products to market:
So, how can an investor take advantage of analysts' mistakes? If you're a value investor, wait for the analysts' next overheated incorrect estimate, which may be so ridiculously high that even a company posting strong gains can't "beat" it.
When the stock gets beaten up, and discounted unnecessarily, make your move, and buy it, OR, do this:
Sell Cash Secured Puts: If you want to hedge your bet, you can sell a cash secured put below the stock's current price, which will give you a lower break-even price. Better still, you'll get paid now to wait, and you'll often get paid much more than the next few quarters' dividends.
In the two examples below, CAT's put options pay over 9 to 12-plus times the amount of its dividends. The further out in time you sell an option, the more premium you get paid, and the lower your break-even price is.
However, your annualized yield is also lower, since your broker will be holding a cash reserve of 100 times the put strike price in your account against the put sale, until the put expires or is assigned or bought to close out the position.
(Note: There are more details on these and over 30 other high yield Cash Secured Puts trades in our Cash Secured Puts Table.):
Hedging gains with covered calls: Conversely, if you already own CAT shares, and you're leery of a market pullback, selling covered call options will hedge some of your profit by giving you some additional income on your shares.
The catch is that you're obligated to sell your shares at whatever strike price you sell calls at. So, you're foregoing potential price gains, in return for immediate option income.
However, the two examples below have strike prices above CAT's current strike price, and offer the potential for an additional $3.80/share in price gains, if your shares get assigned.
Again, the longer-term August call options pay more than the May calls, and both call options heavily outstrip the corresponding dividends' payouts.
(You can discover more details for these and over 30 other lucrative option trades in our Covered Calls Table.):
Financials: These two Dow dividend stocks both have attractive management ratios, and good interest coverage, but if you're looking for 2012 growth at a reasonable price, CAT is the more appealing of the two.
Disclosure: Author is short CAT put options.
Disclaimer: This article is written for informational purposes only and isn't intended as investment advice.
Additional disclosure: I'm long CAT via being short CAT put options.