Lam Research: Post-Earnings Price Hike Expected

Apr. 06, 2018 11:20 AM ETLam Research Corporation (LRCX)14 Comments

1.65K Followers

Summary

LRCX has exceeded estimates for the past eight quarters, but the stock fell after the announcement in five of those quarters.
Three analysts have initiated coverage on the company in the past week, and all project much higher price targets.
We have identified one indicator that successfully predicted the largest-gaining price increase after earnings, and it is now in effect for only the second time in two years.

Lam Research (NASDAQ:LRCX) announces earnings after the market closes on Tuesday, April 17, 2018. Here are the relevant numbers for the last eight quarterly earnings announcements:

LRCX has an unblemished record of exceeding estimates every quarter for the last two years. However, the stock price fell after five of the eight announcements. Most of the post-announcement price changes were minimal, averaging 3.75%. Note that the only time that the stock rose substantially after the announcement (4/18/17), in the three weeks leading up to the announcement date, it had traded lower. In all of the other periods, the stock rose as the announcement date approached (the green prices in the above table are all lower than the price at the close on the day before the announcement).

When the stock price rises as the announcement period approaches, it is a strong indicator that expectations are rising. When expectations are high, the stock tends to fall regardless of how great the earnings might be. The average change in the stock price for the quarters when the stock rose in the three weeks leading up to the announcement was -0.86% while the average price change for the one quarter when the price fell going into the announcement date, the stock rose 10% by the end of announcement week. Earnings exceeded estimates in all eight quarters, but the expectation level was clearly more significant that the actual results.

This time around, it looks very much like the stock is falling as the announcement date approaches. Since the recent history shows a much higher correlation between the level of expectations and the stock price change than the actual results, this should be seen as a strongly bullish sign.

The technical indicators seems to support a bullish sentiment as well:

LRCX has declined lower over the past few weeks after sellers stepped in at resistance from a rising channel top. The stock price is currently lingering near a confluence of the 100-period and 50-period daily moving averages. While these moving averages have not historically been respected on a daily chart, the 50-period moving average was pivotal in reversing price action in the steep decline that occurred in early February. That same weekly moving average is now found near a horizontal level at $178 which was significant support in early December. The support level also resides near the bottom of rising channel that has been in play since July. The first level of upside resistance falls at $219 as the level proved to be a major hurdle in November and January.

The options are pricing in a 7.6% fluctuation after the announcement, a huge number compared to the average 3.75% fluctuation over the past two years. For investors bullish on the company, this would seem to be a great time to write an out-of-the-money short-term call on the stock, and enjoy some generous premium income as well as some price appreciation once the announcement is made.

If you are interested in an options play that we at Terry's Tips have suggested, you might check it out here.

To summarize our thinking, we believe that LRCX will move higher after the announcement. Recent analyst thinking is bullish, and there seems to be technical support for a higher stock price as well. But our strongest argument is based on the apparent lower level of expectations that has only existed once before in the prior eight quarters, and that time, the largest post-announcement gain took place (it gained 10% by the end of the week). The company has consistently bested estimates, but the market has taken a ho-hum reaction to the actual numbers. Expectations seem to be a better measure of what the likely direction the stock will take after the announcement, and today's lower level of expectations are extremely bullish.

Unless the stock rallies strongly between now and April 16, we expect to see a nice gain in the stock price after earnings are announced, regardless of what they might be.

This article was written by

Terry Allen

1.65K Followers

Publisher of options newsletter TerrysTips.com since 2001.. Thirty years experience trading options virtually every day. including stint as seat holder and market maker on the C.B.O.E. MBA from Harvard Business School and DBA from Univ. of Virginia Darden School. Author of Making 36%: Duffer's Guide to Breaking Par in the Market Every Year, In Good Years and Bad (4th revision - 2012) and Coffee Can Investing: A Better Idea Than Mutual Funds in an IRA or 401(K), 2014. TerrysTips.com is a newsletter that carries out eight different option portfolios which many subscribers mirror on their own or through auto-trade at several brokers who make all the same trades in individual customer accounts. Each portfolio offers something different (bullish, neutral, or bearish),and different underlyings (GOOG, SPY, SVXY, and other individual companies). In 2005, the S.E.C. brought an action against Dr. Terry Allen, claiming that he was managing money for people without being a registered investment advisor because of the auto-trade service offered by several brokers who placed trades in their customer accounts based on Terry’s Tips newsletter recommendations. A second complaint was for a single statement on his website that they believed was incorrect and therefore fraudulent. Although two large law firms assured Dr. Allen that if he went to court on the first issue, he would win because there was a Supreme Court decision stating that investment newsletters are exempt from registration requirements - it would be a violation of their First Amendment rights. However, they estimated that his legal expenses would be greater than settling with the S.E.C. (and a year or two of his time tied up in court proceedings), and both firms recommended that he accept the settlement offer while not admitting any guilt. The second issue (fraud) involved a single statement that was true when it was written but a couple of years later, option prices fell to 10-year lows, and it was no longer true. The S.E.C. argued that the statement was not removed from the website in a timely enough fashion. For the past eight years since the settlement with the S.E.C., Dr. Allen has have been publishing the Terry’s Tips newsletter (and recommendations are executed in customer accounts at thinkorswim by TD Ameritrade through their Auto-Trade program), and the S.E.C. has not objected to any of his activities.

Analyst’s Disclosure: I am/we are long LRCX OPTIONS SPREADS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Summary

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