Trading The Earnings And Analyst Ratings - Case For Alcoa, Walgreens, And Intel

Includes: AA, INTC, WBA
by: Mitch Bulajic

Trading stocks after earnings announcements and/or major analyst rating changes can be very profitable from a risk/reward standpoint.

This and following earnings quarters in 2019 are very promising for this strategy.

We will take a closer look and opportunity for Alcoa, Walgreens, and Intel.

The Theme

Trading stocks after earnings announcements and/or major analyst rating changes (color, upgrade/downgrade, target, etc.) that in bulk happen after the earnings announcement can be very profitable and from a risk/reward standpoint and much more appealing than trading and speculating the outcome of the earnings announcement.

The aim is to come up with a short list of stocks that shows a strong market consensus and high directional probability following these events, based on our four-part analysis.

Four-Part Analysis

  1. Analyst Changes and Sentiment (analyst color, rating and target price)
  2. Post Event Sentiment (volume, liquidity, implied volatility, put/call ratios, and price change)
  3. Technical Analysis (current price patterns, change and disruption of price patterns, price and time targets, and cycle analysis)
  4. Correlations and Inter-Market Analysis (relationship to peers, industry, sector and market, and determining absolute and relative stock specific price strength)

The trades are usually entered between one and five trading days after the events, and last anywhere from one week to usually the following earnings announcement. The universe of tradable stocks is rounded to the stocks that have weekly expirations, which is a measure of sufficient liquidity of the stock and the stock options while enabling use of frequent option expirations and structured trades. Trades are structured as stock outright buys or sells, stock option spreads, index spreads, and stock pairs.


At this time we will look into and structure option spread trades for: Intel following analyst reactions to its Data-Centric Innovation Day in San Francisco Tuesday; Walgreens following analysts' reaction to Q2 earnings miss on Wednesday; and Alcoa following analyst downgrades and confusion within the last week.

Alcoa Corporation (NYSE:AA)

The Analysts

Credit Suisse downgrades shares of Alcoa on Tuesday to Neutral from Outperform with a $31 price target from $40, and BofA Merrill Lynch downgrades shares of Alcoa on Wednesday to Neutral from Buy with a $31 price target, while just a week before Morgan Stanley maintained mildly bullish overweight for Alcoa with a price target of $35. In summary, a bit of analyst inconsistency and confusion.

Table 1 - (Courtesy of Benzinga)

Our Take

Current broker recommendation average is 1.58, and it has been at these strong levels since mid-2017 despite the slide in the stock price since mid-2018. We expect the analyst rating despite the recent downgrades to stay at these strong levels, particularly if the stock bounces from the lows as we expect.

Chart 1 - (Courtesy of Zacks Research)

Alcoa had four upside EPS surprises in a row, the last one being 106.25% upside on January 16. Analyst average price target has been dropping from mid-2017 high of $58 to the current $38.93, which is very realistic even as a mid-term target, should there be a price bounce as we expect.

Chart 2 - (Courtesy of Zacks Research)

Alcoa is in the midst of a bottoming consolidation that started this year. Money flows (institutional and speculative) and relative strength have been strong and diverging from the bottom, and both (long and short) cycle indicators have been neutral. We predict a short-term price bounce to the upside, with possible mid-term pullback creating a second bottom as part of a mid-term bottom consolidation. We are looking at two price targets as retracement from the April 19 high of 62.35 and December 24 low of 25.01 - first a Fibonacci 23.6% price target at $33.5 and second a Fibonacci 38.2% price target at $39. Particularly strong is the second target, as it is very close to the $40 resistance developed from July to September 2018 and also the current average analyst price target at 38.89.

Chart 3 - (Courtesy of TD Ameritrade ThinkorSwim)

The Trade

Our bullish short-term to mid-term forecast warrants conventional strategies of buying stock or LEAP calls. In addition, we find attractive alternative complex options spread trades, as follows:

  • Shorter-term VERTICAL CALL SPREAD (BUY VERTICAL AA JULY 19 30/35 CALL @1.15 DEBIT) with maximum profit of $188 around the first target price of $33 and maximum loss of $115 (not including dividend risk and no stop-loss implementation).
  • Longer-term CONDOR (BUY CONDOR AA OCTOBER 18 2019 30/33/38/40 @0.88 DEBIT) with maximum profit of $212 in the range of the first $33 and second $39 price targets and maximum loss of $88 (not including dividend risk and no stop-loss implementation).

Chart 4 - (Courtesy of TD Ameritrade ThinkorSwim)

Walgreens Boots Alliance, Inc. (NASDAQ:WBA)

Walgreens on Tuesday reported fiscal second-quarter results that fell short of expectations by 3.51% in what management described as the "most difficult" quarter since late 2014. Here is a summary of how some of the Street's top analysts reacted to the print.

The Analysts

  • Loop Capital Markets' Andrew Wolf downgraded Walgreens from Buy to Hold with the price target lowered from $77 to $65.
  • Wells Fargo's Peter Costa maintains Outperform; price target lowered from $75 to $65.
  • Morgan Stanley's Ricky Goldwasser maintains In Line; price target lowered from $67 to $61.
  • Mizuho Securities' Ann Hynes maintains Neutral; unchanged $67 price target.
  • Raymond James' John Ransom maintains Market Perform.

Our Take

Broker ratings were weakening since the high average of 1.433 in August 017 to current 2.765, and the price bounce in the second half of 2018 was not warranted by analyst actions, so we can expect the analyst ratings to keep on weakening along with the price for at least this quarter.

Chart 5 - (Courtesy of Zacks Research)

Analysts cut the price target dramatically from the previous average of $72.3 to $61-65, which for this quarter at least is very unlikely to come even close - even at these lowered price targets.

Chart 6 - (Courtesy of Zacks Research)

Technically, we are looking at a negative divergence and break-down of the long-term monthly money flows and momentum. Particularly troubling is the negative money flow which never even confirmed the July 2015 high and has since been in a downtrend, even through the rally in second half of 2018 that justifies the sharp drop in 2019 year to date. The selling will most likely continue to the $50 strong double support level - 61.8% Fibonacci retracement level between March 2009 low and July 2015 high, and very long-time historic resistance level from 2000 until 2013 which can possibly be now a strong support.

Chart 7 - (Courtesy of TD Ameritrade ThinkorSwim)

The Trade

Volatility and risk don't warrant an outright sell strategy, but to sell WBA's stock and buy equal dollar amount of SPY - as a currently attractive long/short trade. In addition we find the following attractive alternative complex options spread trade:

  • DIAGONAL PUT SPREAD (BUY DIAGONAL WBA 24 MAY/18 APRIL 50/52.5 PUT @0.29 DEBIT) with maximum profit around 52.5 at April expiration should the stock continue to slowly drift lower and with maximum unlimited profit should the stock collapse between April and May expirations, and maximum loss at $29 if neither scenarios materializes.

Chart 8 - (Courtesy of TD Ameritrade ThinkorSwim)

Intel Corporation (NASDAQ:INTC)

The sell-side viewed the Data-Centric Innovation Day event in San Francisco as reaffirming the chip giant's performance leadership in data center products.

The Analysts

  • Oppenheimer analyst Rick Schafer maintained a Perform rating on Intel.
  • Morgan Stanley analyst Joseph Moore maintained an Overweight rating and a $64 price target.
  • Bank of America Merrill Lynch analyst Vivek Arya maintained a Buy rating and a $62 price target.
  • Raymond James analyst Chris Caso maintained an Underperform rating.

Out take

Broker recommendations were falling at a stronger pace than the price, weakening from 1.968 in January 2018 to current 2.448, suggesting that based on the fresh analyst ratings above and the positive price action, analysts will be aggressively strengthening the ratings.

Chart 9 - (Courtesy of Zacks Research)

Analysts also raised the price target from the current average $54.67 to between $62 and $64. It also confirms this fresh analyst forecast and gives us the mid-term resistance levels to work with.

Chart 10 - (Courtesy of Zacks Research)

Technically, we are looking at in-line positive weekly money flows (speculative and institutional), momentum and cycles; however, the $57 price resistance and the volatility band resistance (at about the same level) will be factors and should be testing this level in days. The analyst price targets of $62 and $64 are in line with expansion price targets which are in the range of $62 to $66 - confirmed by technicals.

Chart 11 - (Courtesy of TD Ameritrade ThinkorSwim)

The Trade

A conventional way to play this event, in addition to just buying outright INTC, is to buy the stock and write a 2-3 month out call at around the $57 resistance level or buy the stock and sell equal dollar amount of QQQ as a currently attractive long/short trade. In addition, we find the following attractive alternative complex options spread trade:

  • CONDOR (BUY CONDOR INTC 19 July 55/57.5/62.5/65 Call @0.92) with maximum profits between $57.5 and $62.5. Upper one standard deviation band for the July expirations is at $63.5, and the upper break-even price at $64 is also well in line with the mentioned projected ($62, $66) and analyst price targets ($62, $64). Maximum loss for the trade is $92 (not including dividend risk and not stop-loss implementation), while maximum profit is $158.

Chart 12 - (Courtesy of TD Ameritrade ThinkorSwim)

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.