My Plan To Navigate A Volatile Earnings Season
As we have seen in recent weeks, investors seem to be preparing to ignore the news and the impact of the global pandemic. And with earnings season kicking off, many companies seem to be preparing to help investors continue looking past it.
Financial Times noted that this isn’t solely an American phenomenon. Globally, companies have always reported their results in ways that emphasize the positive. EBITDA is one metric that’s a widely reported for that reason.
EBITDA is earnings before interest, taxes, depreciation, and amortization. According to some management teams, ignoring those variables helps investors see how management is operating efficiently. However, if a company carries a lot of debt, operations might be fine, but interest expenses could spell doom.
That’s why it’s important to dig deep into financial reports.
According to Financial Times, there’s a new metric on the horizon… EBITDAC.
Yes, the C stands for coronavirus. And, just like excluding interest, taxes, depreciation, and amortization, excluding those expenses could improve the financials of some companies.
Private companies aren’t the only ones ignoring the impact of coronavirus. The Federal Reserve is using the same trick.
Under the Fed’s plan to buy bonds, they will only be buying bonds of companies that have investment-grade ratings. The Fed’s announcement of the program notes, “The issuer was rated at least BBB-/Baa3 as of March 22, 2020, by a major nationally recognized statistical rating organization (“NRSRO”). If rated by multiple major NRSROs, the issuer must be rated at least BBB-/Baa3 by two or more NRSROs as of March 22, 2020.”
This was about a month after the stock market began its decline and about a week after the government ordered a shutdown of nonessential activities.
Strap In, Folks…
All of this means earnings season could be more volatile than average.
So how do we trade this? Well, over at my premium Income Trader service, I will avoid positions where the option will be open when the earnings report is scheduled to be released.
That may mean there will be weeks when there are no trades, but it is always better to be safe than sorry. That’s true of Covid-19, and it’s definitely true of the stock market right now.
However, I did recently recommend a trade in International Business Machines Corporation (NYSE: IBM).
The company is expected to announce earnings on July 20. I am recommending an income trade in an option that expires on July 10.
IBM is on an Income Trader Volatility (ITV) “buy” signal. For those who aren’t familiar with my ITV indicator, this is the award-winning tool I developed to help select my regular Income Trader recommendations. Of the weekly trades I’ve recommended, 90.5% have been winners going all the way back to 2013.
How I’m Trading IBM
IBM offers value, trading at less than 12 times this year’s expected earnings. Of course, there is a great deal of uncertainty associated with the current year. I believe IBM is likely to be attractive at this level… if the uncertainty didn’t exist.
But because there is some uncertainty, I’m strictly looking at a short-term, high-income trade in the stock.
You see, most investors would be content to simply buy the stock and hope for the best. But that’s not what we’re doing over at Income Trader.
We’re making a quick, easy trade on IBM to generate income now. All told, we can expect to make about 2.6%. And while that may not sound much, we’ll accomplish this in only 17 days. If repeated a similar trade every 17 days, we would earn about 56% on our capital in 12 months.
That’s the power of my strategy — and you can put it to work for youself in no time at all.