There is no better way to capture big short term gains than by trading stocks releasing earnings. For a brief moment in time all macro data moves to the background as investors digest operating profits resetting the price of a particular stock.
Depending on how the company performs against expectations, shares will either rise or fall. The moves can be quite spectacular. The key to successful earnings trading is to reliably predict outcomes in advance of the event by using key data points that I have developed over many years of analyzing stocks.
Nobody has the crystal ball to predict the future, but you can get a good idea of what is about to transpire and therefore a trading outcome that can be used to make big money. Over the last year I have done this with fantastic results generating significant returns for investors.
Some of the biggest winners were stocks that did well on an operating basis, but were sold short heavily heading into the earnings report. The subsequent short squeeze that can occur when news is positive can result in a stock moving higher by 10% or more.
When a stock is sold short, investors are betting on the decline of sales and profits or both. If that decline fails to materialize the shorts will run to the exits covering their positions. That extra buying is what creates the fuel for big gains when the news is released.
Having a large short position is but one factor in identifying earnings trading opportunities, but it is a big one. With that in mind here then is this week’s top earnings trade of the week:
SodaStream International (NASDAQ: SODA)
SodaStream International is the maker and seller of home beverage systems. Similar to the popular K-Cup single serve coffee system, SodaStream’s products allow consumers to turn ordinary tap water into carbonated soft drinks or sparkling water. Products include a range of beverage makers and flavor enhancers.
Investors have treated SodaStream similar to Green Mountain Coffee (GMCR). Up until this summer SodaStream was one of the best performing stocks in the market this year. In its last earnings report for the period ending June 30 the company disappointed investors by simply affirming guidance for the future. Shares plunged and short interest in the company skyrocketed.
As of October 14 there were 6.55 million shorts outstanding. That is nearly half of the available float in the stock at 13.55 million shares. There are clearly those that are betting against this company.
While shares may have been over-priced earlier in the year, the recent plunge in the stock creates an opportunity for traders. Wall Street expects the company to make 25 cents per share for the period ending September 30. That is a penny lower than where estimates stood 90 days ago.
SodaStream has beaten expectations by a wide margin in each of the last 3 quarters. For the full year Wall Street is looking for the company to make $1.06 per share. That number jumps 25% to $1.33 in 2012. At current prices shares of SodaStream trade for 33 times current earnings.
The catalyst for the current report will be important updates with respect to retail sales opportunities with discount giants Target (TGT) and Wal-Mart (WMT). SodaStream has yet to go main stream like Green Mountain Coffee. When that happens sales and profits are likely to go through the roof.
To the extent the company beats earnings and provides positive guidance, shorts are likely to acknowledge defeat. The resulting short squeeze could result in SodaStream gaining 10% or more after the news is released before the market opens on Wednesday.
I would be long SodaStream in advance of earnings.