Earnings season has arrived, and not a moment too soon.
At last, let’s make some money in 2016…
The market is falling apart before our very eyes. It was a very orderly exit from stocks, but an exit nonetheless.
Wondering what’s wrong with the market? Look no further than Intel (NASDAQ:INTC).
The semiconductor bellwether reports earnings on Thursday after the market closes.
While the major market indices race to their correction lows, Intel shares have held up relatively well.
That said, Intel stock is definitely in correction territory, down more than 10% from its 52-week highs.
Perhaps the reason for the strong (tongue firmly planted in cheek) near-term outperformance is a result of Intel’s valuation being attractive at current levels.
Many stocks like Intel continue to be overvalued despite all of the selling.
For that reason, the market has struggled mightily in 2016 and is off to its roughest ever start.
Intel will soon join the death throes.
Once earnings are released, the market will have no choice but to face the reality of painfully slow growth for Intel going forward.
Analysts currently expect Intel to grow profits by a very weak 6% in 2016.
With shares trading for an expensive 14 times 2015 estimated earnings, the risk to the downside is substantial. Intel must deliver a pristine earnings report to avoid massive selling in shares to correct for the overvaluation.
Any disappointment will be met sternly by the market.
The biggest risk is for guidance. It’s only natural for management teams to lower the bar at the year’s beginning, especially in a low-growth environment.
The moneymaking trade, then, is to speculate on Intel put options before the news is released.
The expected value of that trade is quite large, with upside potential of 200-500% and downside risk capped at 100%.
If you’re looking for big-gain earnings trades, Intel is a great place to start.
The stock is not prepared for disappointment, so if disappointment arrives (a likely event), then all bets are off.