3 Mega-Cap Stocks To Trade After Sour Earnings Reactions


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Negative earnings reactions are often opportunities

After a hideous ending to 2018, this year started out much better. Sentiment on Wall Street flipped positive after the Christmas crash as the fears from the Fed threat abated. Yesterday we rekindled some of it, but this time it was more of a disappointment than fear for cause.

Yesterday, Federal Reserve Jerome Powell refused to commit to a rate cut so investors threw a fit in the afternoon. This is different than fearing harmful action from the Fed. After all, they are still dovish and supportive of the economy and when things are going this well we don’t need a cut yet.

Case in point, we are in the throes of yet another earnings season and, so far, companies have delivered strong results after a tough year for equities in 2018. Some stocks fell on good earnings reports and they deserve attention.

When a company misses earnings estimates it might be the fault of management, but other times, stocks fall for all the wrong reasons. Today we will examine three mega-cap stocks that delivered on their promises yet investors sold their stocks on the headlines.

Not every falling knife is safe to catch as some will cost you fingers. But in this bullish market, some dips are worth buying.

Intel (INTC)

Intel (NASDAQ:INTC) has been a proven company for decades. It survived the Dot Com bubble and helped change our world into what it is today. We now rely more on technology than ever and the speed of adoption is exponential. This is a global trend that is here to stay, so there will continue to be strong demand on INTC products and services for decades.

Wall Street hated INTC’s earnings last week and the stock tumbled 13% since then. This qualifies as a correction per Wall Street standards. This dip is worth a buy because of two factors. First, this is a cheap company, so there is not a lot of froth to lose. Second, it is now technically falling into a support zone. Both of these facts mean that it will find support sooner rather than later as long as markets in general hold up. If the S&P 500 needs to also correct, then, of course, INTC has more downside to $47 per share.

Advanced Micro Devices (AMD)

On the other end of the chip sector spectrum is Advanced Micro Devices (NASDAQ:AMD). This is the comeback stock that has shined for over a year. It is up 144% in a year which is seven times better than the VanEck Vectors Semiconductor ETF (NYSEARCA:SMH). INTC and Nvidia (NASDAQ:NVDA) are down -3% and -20%, respectively, for the same period.

AMD stock proved to be resilient even in tough times. Last year when the whole market was falling into an abyss, AMD stock delivered positive results. So the thesis to buy it on dips is that it continues to outperform this year too. It is up 45% which is 40% better than the SMH and almost six times better than INTC. Clearly, it is in favor on Wall Street.

But this is a frothy bet from a valuation perspective. AMD’s price-to-earnings ratio is almost 90, which is six times more expensive than INTC. But in this case, you get what you pay for from the stock price action perspective. It’s down to traders’ preferences and timelines as to which to buy: Intel stock or AMD stock.

United Parcel Service (UPS)

Commerce is becoming more online transaction than in-store. So this puts more demand on shipping. Recently, transport stocks fell back into favor but not so much United Parcel Service (NYSE:UPS) or FedEx (NYSE:FDX). While the iShares Transportation Average ETF (BATS:IYT) is 8% off its recent all-time high, UPS is almost 22% away from its all-time high.

There are specific threats that plagued UPS stock like the driver shortage and other operational challenges. But the bigger elephant in the room is the looming threat of Amazon (NASDAQ:AMZN) entering as their competition. This is the most fearsome competitor to have ever existed so the fears are real. But in the end, as demand for delivery services grows, there will be room for all those competing and UPS will adjust.

Furthermore, energy prices have been spiking for weeks and that puts pressure on a big line item in the UPS profit and loss statement. But from here, oil is more likely to fall than rise, so there might be relief from that aspect.

Also and after the earnings, the UPS stock price fell into a support zone. The area around $102 per share has been pivotal since November 2013. These are areas where bulls and bears agree on price, so on the way down this creates price congestion, which translates into support. This is not a hard line in the sand but it is a cushion that will help the stock find footing. To fall further below it means that the bears have worse news that is not out yet.

The bottom line is that UPS is a proven company, so whatever ails the stock is not symptomatic of a sick company. This is a case of a temporarily broken stock but not the company.

In summary, often the negative reaction to earnings is an opportunity to buy a great stock. These are three mega caps that are worth owning on dips. But since we still have headline risks looming, traders should not go all in when buying stocks. Doing it in tranches leaves room for error so we can add and lower the entry costs in case the price goes against the trade.

Nicolas Chahine is the managing director of SellSpreads.com. As of this writing on May 2, 2019, he did not hold a position in any of the aforementioned securities.


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Category: Earnings Roundup

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The author of this article is a contributor to InvestorPlace.com.