Jittery investors are penalizing stocks that miss estimates to the greatest extent in years, sending shares down 4.3% on average in the three days following earnings results, nearly four times the 15-year average, as of Jan. 24 according to data compiled by Evercore ISI. The historically strong reaction from investors has occurred even as analysts have slashed S&P 500 earnings-per-share estimates for the first half of 2019 by the most in four years.
With that in mind, Goldman Sachs has screened a list of upcoming earnings announcements where options traders are seeking the most downside protection against a miss, including DISH Network Corp. (DISH), Symantec Corp. (SYMC), Palo Alto Networks Inc. (PANW), Huntsman Corp. (HUN), Qorvo Inc. (QRVO), Whiting Petroleum Corp. (WLL) and Continental Resources Inc. (CLR), per Business Insider.
7 High-Risk Stocks
(Company; Ticker; Q4 Earnings Date)
- Symantec; SYMC; 1/31
- Qorvo Inc.; QRVO; 2/7
- Huntsman; HUN; 2/12
- Continental Resources, CLR 2/18
- Dish Networks; DISH; 2/19
- Whiting Petroleum; WLL; 2/19
- Palo Alto Networks Inc.; PANW; 2/25
"We look for footprints left in the options market from large trades done ahead of earnings to gain insight on sentiment and positioning ahead of reports. In materials, tech and energy sectors, option investors are pricing in very high fear levels for a number of stocks," wrote Goldman derivatives strategist Katherine Fogertey.
Landmines Remain in Tough Q4 Earnings Season
As earnings season ramps up, there are plenty of potential landmines, according to Goldman. The firm sorted stocks in ascending order of the implied move for Q4’s report, less the average realized earnings move over the past eight quarters.
“All stocks below have 1m normalized 25 delta put-call skew in the 75%-ile or higher, indicating a demand for protection ahead of earnings,” wrote Goldman. Companies in the list ranged from industries including consumer, communications, technology, basic materials, and energy.
Number 10 on the list was Continental Resources, with an implied move of +/- 8.1% and an average realized move of 4.3% over the recent eight quarters. Pharmaceutical company Mallinckrodt PLC (MNK) led the list, with an implied move of +/- 16.2% vs an average realized move of 8.3% over eight quarters. The company is expected to report results on Feb. 26.
Chip Makers Beware
Per Goldman, options traders are bracing themselves for an earnings swing from Qorvo, a Greensboro, NC-based chip maker. On Tuesday, shares of fellow semiconductor manufacturer Nvidia Corp. (NVDA) plunged on a massively reduced revenue forecast. Analysts at firms including Morgan Stanley and Needham downgraded the stock on the disappointing report which company management blamed on “deteriorating macroeconomic conditions, particularly in China,” which impacted consumer demand for Nvidia’s gaming GPUs, per CNBC.
Other chip makers including Qorvo and Micron Technology Inc. (MU) could be in for a similar ride as earnings season kicks into full swing. Not only does China serve as a major end market for chip makers, but also a prime manufacturing hub, making these companies particularly vulnerable to U.S.-China trade tensions.
TV Is Old News
Shares of DISH Networks have plunged over 36% in 12 months, compared to the broader S&P 500’s negative 6.5% return, as investors remain concerned regarding a widespread shift away from traditional TV packages towards on-demand streaming. While the firm has had success with its over-the-top internet TV service, Sling TV, bears fear that the the cash flow from this offering may not be enough to offset huge declines in its satellite business. Meanwhile, competition in the direct-to-consumer space is only intensifying, with Sling heading off against deep-pocketed competitors like Walt Disney Co. (DIS), and Apple Inc. (AAPL).
Other stocks that Goldman were betting against have already been slammed on poor earnings, including Harley Davidson (HOG), which saw its shares crash on Tuesday thanks to weaker-than-expected Q4 results in which 2019 shipments came in at their lowest level in eight years.
It’s important to note that while options traders aren't always right, they can provide important red flags for investors in an increasingly risky market.