Trading The Earnings And Analysts' Ratings - Case For Apple, Chipotle, And The Retailers

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Includes: AAPL, BBBY, CMG, DKS, DLTR, FIVE, JWN, LB, XRT
by: Mitch Bulajic
Summary

We published the Weekly Analysts' Activity, filtered to weekly expiration stocks, and paired it against our Scorecard to find potential discrepancies and opportunities.

We found a similar situation and trading opportunity for Apple and Chipotle prior to earnings, as our focus of the article stocks.

We looked at the Retail sector following analyst's article to investors and took a quick look at the retail stocks that had analyst activity in the prior week.

Focus of our Stock coverage with specific trade recommendations is on Apple Inc. (NASDAQ:AAPL) and Chipotle Mexican Grill, Inc. (NYSE:CMG) - where there has been plenty of analyst activity and development of interesting technical factors right before the quarterly earnings.

We also took a look at the Retailing sector, following an article by James Knightley, Chief International Economist from ING, wherein our spotlight are 6 retail sector stocks that had analyst activity in the past week: Dollar Tree, Inc. (NASDAQ:DLTR), Nordstrom, Inc. (NYSE:JWN), Five Below, Inc. (NASDAQ:FIVE), L Brands, Inc. (NYSE:LB), Dick's Sporting Goods, Inc. (NYSE:DKS), and Bed Bath & Beyond (NASDAQ:BBBY).

We have also published the Weekly Analysts' Activity, filtered to weekly expiration stocks, and paired it against our Scorecard to find potential discrepancies and opportunities.

Readers that are not familiar with our analytical and research approach can read the Theme section in our prior Seeking Alpha article from April 7: "Trading The Earnings And Analyst Ratings - Case For Alcoa, Walgreens, And Intel."

Analysts' Ratings

Table 1 - (Courtesy of Clarendon Global)

Scorecard

Table 2 - (Courtesy of Clarendon Global)

Picks

Apple Inc. - Analysts' take

  • Late on Friday Morgan Stanley (NYSE:MS) on Apple notes, "March marked a third consecutive month of Y/Y smartphone installed base share gains for Apple in China, and the strongest month of Y/Y share gains in 15 months;" Maintains Overweight, $220 Target.
  • Prior to Morgan Stanley, analysts' ratings also came from Credit Suisse (NYSE:CS), Bank of America (NYSE:BAC) and HSBC during past week.

Table 3 - (Courtesy of Benzinga)

Apple Inc. - Our take and trade

The analysts' mixed ratings and confusing statements during last week, along with a wide above and below current price targets, show lack of conviction and direction from the analysts - all that right before the earnings announcement due on April 30.

Apple has strong but fading characteristics in all observed analytics: money-flows (institutional and speculative), relative strength, cyclical and sentiment - typical for overbought stock entering a consolidation phase.

The price pattern is also at an extreme 61.8% Fibonacci retracement from the previous high-low range, with the best-case scenario to reach the 78.6% Fibonacci retracement level at 214 (purple lines in chart 1 below). If the current price level turns out to be the intermediate high from the previous low, then we are looking at two support levels: Fibonacci 23.6% at 189 and 38.2% at 180 (light blue lines in the chart 1 below).

We think that the price range in the next few months (also having in mind and consuming the upcoming earnings) is going to be unidirectional and tighter than predicted, so we adjusted the standard deviation price band (red probability cone on chart 1 below) to our forecast price band (green probability cone on chart 1 below).

Chart 1 - (Courtesy of TD Ameritrade ThinkorSwim)

The trade we recommend is taking advantage of the predicted narrowing range market and currently very high implied volatility prior to the earnings announcement on April 30. So we recommend selling an Iron Condor (SELL MAY-3-19 2215/215/187.5/185 Iron Condor @0.80), where the upper and lower breakeven points (yellow dashed lines in chart 1 above and chart 2 below) are comfortably at or beyond the cone prices and support/resistance levels mentioned above.

Chart 2 - (Courtesy of TD Ameritrade ThinkorSwim)

Chipotle - Analysts' take

Jefferies Downgrades Chipotle To Hold, raises target from $600 to $700 as firm believes "valuation is full and reflects improved visibility for powerful SSS and margin drivers," and suggests to investors to take some chips off the table.

Table 4 - (Courtesy of Benzinga)

Chipotle - Our take and trade

Similar to our comments for Apple above, the analysts' mixed ratings and confusing statements during last month, along with a wide above and below current price targets, show lack of conviction and direction from the analysts - all that right before the earnings announcement due on April 24.

Chipotle has strong but fading characteristics in all observed analytics: money-flows (institutional and speculative), relative strength, cyclical and sentiment - typical for overbought stock entering a consolidation phase.

The price is almost at the all-time high from August 2015 at 759 which stands as a long-term strong resistance. If the current price level turns out to be the intermediate high from the previous low, then we are looking at two supports between the Fibonacci 23.6% at 644 and 38.2% at 540 (purple lines in the chart 3 below).

Similar to our Apple analysis above, we think that the price range in the next few months, also having in mind and consuming the upcoming earnings), is going to be unidirectional and tighter than predicted, so we adjusted the standard deviation price band (red probability cone on chart 3 below) to our price band (green probability cone on chart 4 below).

Chart 3 - (Courtesy of TD Ameritrade ThinkorSwim)

The trade we recommend is taking advantage of the predicted narrowing range market and currently very high implied volatility prior to the earnings announcement on April 24. So we recommend selling an Iron Condor (SELL APRIL-26-19 755/750/675/670 Iron Condor @>2.5), where the upper and lower breakeven points (yellow dashed lines in chart 3 above and chart 4 below) are comfortably at the cone prices and resistance level mentioned above.

Chart 4 - (Courtesy of TD Ameritrade ThinkorSwim)

Retail Sector - Analysts' take

James Knightley, Chief International Economist from ING, wrote in his article addressed to investors "US: Retail sales continue to slumber": "US retail sales missed expectations in February. Weather may have played a part, but with household incomes continuing to rise thanks to employment and wage growth gains, we remain upbeat on the sector's prospects."

Retail Sector - Our take

Looking at the SPDR S&P Retail ETF (NYSE:XRT) chart 5 below, there is absolutely no conviction or indications of direction (or volatility for that matter) from any of our observed indicators or price patterns. The most likely and only catalyst for the change is apparently macroeconomics, particularly consumer spending, and the upcoming quarterly earnings for the retail stocks.

Chart 5 - (Courtesy of TD Ameritrade ThinkorSwim)

We also looked at the six retail sector stocks, extracted from the Analysts' Ratings (table 1) and Scorecard (table 2), and did not find anything opportunistic. The exception to watch but not trade (yet) is JWN, where the KeyBank analyst upgraded the stock with a price target at 55. JWN is struggling on a long-term basis to find a bottom which is still not there and it won't be there until we see a meaningful reversal and positive injection of money flows. What really caught our attention is analyst's price projection of 55 which is very unlikely in the near term, but if one believes in the stock long term and analyst's price target, buying covered calls (continues 3-month expirations or Leaps) is the best risk/reward approach - where the premium would cover the downside to the meaningful support levels at around 40, and enhance returns on the upside.

Table 5 - (Courtesy of Clarendon Global)

Table 6 - (Courtesy of Clarendon Global)

Conclusion

Looking forward to this and following earnings season, consensus on total earnings for the S&P 500 index is expected to be down -4% from the same period last year on +4.5% higher revenues. If actual 2019 Q1 earnings growth turns out to be negative, it will be the first earnings decline since the second quarter of 2016. Overall, this is a tough comparison to last year when margins got a one-time boost from the tax legislation coupled with the rise in payroll, materials and transportation expenses weighing on margins.

However, there are other macroeconomic, political, technological and event-driven factors that are on one side going to be dominant drivers of volatility throughout 2019, and on the other, will be adding complexity and hardship - not just for economic and market forecasting but also for earnings forecasting.

We think that these factors are not properly understood, therefore not reflected in the earnings forecasts, because the general environment will be very challenging for corporate finance and sell-side analysts that cover their companies. As a result, we expect more frequent and erratic analyst statements, lack of consensus and inconsistency of ratings and price targets, and exponentially growing statements from corporate leaders' finger-pointing and blaming whoever for their poor performance.

Overall, this is great environment for implementing this theme in active trading or as a portfolio overlay, and for us an opportunity to analyze more routinely and write more frequently on this theme.

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.