Trade Alert: Earnings, 8/28/2023

Betting against one retailer and betting on another.

Selective, But Not Too Selective

At the bottom of our last Exits post, I mentioned I was probably a little too selective in picking earnings trades last week.

Specifically, I wrote that I had given too much weight to insider buys and sells and not enough weight to Portfolio Armor’s gauge of options market sentiment, so I plan to tack accordingly this week. Recall that insider buys and sells and options market sentiment are two of the six metrics we’ve been tracking for earnings trades:

• LikeFolio’s earnings score based on social data. The higher the number, the more bullish, the lower (more negative) the number, the more bearish.

• Portfolio Armor’s gauge of options market sentiment.

• Chartmill’s Setup rating. On a scale of 1-10, this is a measure of technical consolidation. For bullish trades, we want a high setup rating; for bearish trades, a lower one.

• Zacks Earnings ESP (Expected Surprise Prediction). This is a ratio of the most accurate analyst’s earnings estimate versus the consensus estimate.

• The Piotroski F-Score. A measure of financial strength on a scale from 0-9, with 9 being best.

• Recent insider transactions.

As always, each of these metrics has to be considered in a broader context. For example, one of the stocks we may be betting on later this week has a Piotroski F-Score of only 4, but it also has a profitably rating of 8 (out of 10) on Chartmill—its relatively low Piotroski score is driven by factors such as liquidity, which may not be what drives the share price in the near term. With that said, here’s how today’s two companies stack up on those metrics.

The One We’re Bearish On

1. Social data: -32

2. PA Options sentiment: very bearish

3. Setup rating: 2%

4. Zacks ESP: -2.76%

5. F-Score: 2

6. Recent insider transaction(s): open market purchases in May, after the stock tanked >20% on an earnings miss.

The One We’re Bullish On

1. Social data: +21

2. PA Options sentiment: bullish

3. Setup rating: 8

4. Zacks ESP: +6.12%

5. F-Score: 6

6. Recent insider transaction(s): open market sales in July and August by one insider at slightly higher than current market prices, which gave him returns of about 250% given where he exercised his options.

Details below

Our Bearish Trade