Investors will be paying attention to whether companies beat or miss their earnings expectations, but which direction a stock moves depends on a host of other factors as well. Want proof? Roughly 85% of firms in the
beat estimates during the third quarter, but the average stock fell 0.2% after the release.
A company’s guidance matters—future profits matter more than past earnings—but there are other factors that help determine whether a stock rises or falls after the report, namely how in or out of favor a stock has been. A stock that has been out of favor might rise even if earnings disappoint, while one that is a market favorite might fall even if the numbers are “good.”
Investors don’t have to guess, explains Julian Emanuel, chief equity and derivatives strategist at BTIG. A stock with a high short interest may pop after earnings because numbers that elicit a shrug could be enough to put upside pressure on a stock—and force short sellers to buy back their borrowed stock.
Earnings revisions—the changes analysts are making to their estimates—are also a good way to judge whether a company faces high or low expectations. If revisions have been rising, the bar might be high, while lowered estimates could mean it’s easier for a company to clear it. Finally, a stock that is trading at a low valuation might also be primed to rise, even if earnings aren’t all that, Emanuel says.
Here are five stocks that could pop when they release their numbers…
(LMT) has short interest in the 87th percentile of S&P 500 stocks. It trades at 12.8 times 2021 earnings estimates, a 44% discount to the S&P 500. Earnings estimates have been cut by 1.7% during the past three months, putting the stock in the bottom 50% of the S&P 500. It’s a low “bar to hurdle,” Emanuel says. Lockheed reports on Jan. 26.
(NOC) has short interest in the 77th percentile on the S&P 500 and trades at 11.9 times 2021 EPS, about half the multiple on the index’s average stock. Earnings revisions are down 3.6% in the past 3 months. Northrop reports on Jan. 28.
(KR) is in the 97th percentile of S&P 500 stocks for percent of its shares shorted. It trades at 11.7 times earnings, also about half the multiple on the index’s average stock. Earnings have been cut 0.4% in the past three months. Kroger reports on March 4.
Discovery Communications (DISCA) is the most shorted stock in the S&P 500 and trades at a 50%+ valuation discount. Earnings have been cut by 5% in the past three months. Discovery reports on Feb. 25.
(LNC), a $10 billion insurance and investment management company, is in the 84th percentile for short interest and trades at 5.5 times earnings. Earnings have been cut 3% in the past three months. Lincoln reports on Feb. 3.
…and five that could be ready for a drop:
(TSLA) is among the least shorted stocks in the S&P 500—and one of the most expensive. The electric vehicle innovator trades at more than 220 times earnings estimates, which have been raised 21% in the past three months. Tesla reports on Feb. 3.
(IT) has a short interest in the third percentile and trades at 41 times earnings. Analysts have revised earnings up 16%. The company reports earnings on Feb. 2.
(ROK) has short interest in the 23rd percentile and trades at 29 times earnings forecasts. Estimates have been raised 7.5%. The stock is rather cyclical and has been in favor. Rockwell reports on Feb. 3.
(FTNT) has short interest in the first percentile and trades at 41 times earnings forecasts. Expectations have been revised up by 7% during the past three months. Fortinet reports on Feb. 4.
(ALGN), a $43 billion maker of Invisalign braces, is also among the least shorted companies. It trades at 69 times earnings estimates, which have been raised 21%. Align reports on Feb. 4.
Write to Jacob Sonenshine at email@example.com
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