Earnings Preview: TER Stock, Cathie Wood’s Pick, Nears Q2 Report With 29% Gain Already

After a fabulous run-up in the first half of 2023, investors are scanning for earnings drivers to find the next patches of market strength. And Teradyne (TER) is near a 52-week high ahead of earnings in a few days.

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TER stock, one of Cathie Wood’s picks, takes front stage in a busy week of earnings, along with other leaders like Crocs (CROX) and United Rentals (URI). Both are in bases. Don’t forget PulteGroup (PHM) as homebuilders sell off after their massive rally.

TER Stock Holds 29% Gain

Wood, the ARK Invest fund manager, purchased more than 700,000 shares of TER stock in the second quarter. The chip equipment maker broke out of a consolidation with a buy point of 112.06 in mid-June and remains near that entry. The pattern also could be interpreted as a lopsided double bottom with a 108.91 buy point.

The stock has had an impressive 29% run so far this year, compared with the S&P 500’s 18% gain.

On April 26, the company reported top- and bottom-line numbers that were at the midpoint of its guidance. First-quarter revenue was $617.5 million and earnings per share were 59 cents.

A point of concern is that sales and earnings have been declining for several quarters. But the company has been able to pull off hefty profits as a percentage of revenue. First-quarter gross profit as a percentage of net revenue was 57.7%.

The company expects Q2 revenue of $625 million to $685 million and earnings of 55 cents and 74 cents per share. S&P Capital IQ sees a 45% decline in Q2 earnings to 66 cents per share with sales declining 22% to $658 million.

For next year, however, analysts expect a 66% surge in earnings. Teradyne, which reports Wednesday after the close, makes automatic test equipment for the chip industry.

Will Crocs’ Earnings Surprise?

Crocs is reporting Thursday before the open as it builds a cup base with a conventional entry of 151.32. But the footwear company could also offer an earlier trendline entry around 129.

The shoemaker’s sales and earnings growth have been fairly steady for many quarters. Sales grew 34% to $884.2 million in the first quarter as earnings per share of $2.61 were up 27%.

Capital IQ expects earnings to decline 19% to $2.95 per share and 3.7% sales growth to $1 billion for the second quarter.

Announcing Thursday before the open, United Rentals is forming a cup with handle with a buy point at 471.82 after a solid 29% gain this year.

And PulteGoup has had a more impressive 70% gain this year. The homebuilder reports second-quarter earnings on Tuesday morning. This past Thursday, homebuilders sold off following D.R. Horton‘s (DHI) report, despite a strong quarter and positive comments from management.

Options Trading Strategy Around Earnings

A basic options trading strategy around earnings — using call options — allows you to buy a stock at a predetermined price without taking a lot of risk. Here’s how the options trading strategy works and what a call option trade recently looked like for Crocs.

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First, identify top-rated stocks with a bullish chart. Some might be setting up in sound early-stage bases. Others might have already broken out and are getting support at their 10-week line for the first time. And a few might be trading tightly near highs and refusing to give up much ground. Avoid extended stocks that are too far past proper entry points.

In options trading, a call option is a bullish bet on a stock. Put options are bearish bets. One call option contract gives the holder the right to buy 100 shares of a stock at a specified price, known as the strike price.

Put options are for weak performers with bearish charts. The only difference is that an out-of-the-money strike price is just below the underlying stock price. A put option gives the holder the right to sell 100 shares of a stock at a specified price.

You earn profits when the stock falls below the strike price with a put option.

Check Strike Prices

Once you’ve identified an earnings setup for a call option, check strike prices with your online trading platform, or at Cboe.com. Make sure the option is liquid, with a relatively tight spread between the bid and ask.

Look for a strike price just above the underlying stock price (out of the money) and check the premium. Ideally, the premium should not exceed 4% of the underlying stock price at the time. In some cases, an in-the-money strike price is OK as long as the premium isn’t too expensive.

Choose an expiration date that fits your risk objective but keep in mind that time is money in the options market. Near-term expiration dates will have cheaper premiums than those further out. Buying time in the options market comes at a higher cost.

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This options trading strategy lets you capitalize on a bullish earnings report without taking too much risk. Risk is equal to the cost of the option. If the stock gaps down on earnings, the most you can lose is the amount paid for the contract.

Crocs Stock Option Trade

Here’s how a recent call option trade looked for Crocs, a liquid name in the options trading market.

When Crocs stock traded around 122, an out-of-the-money monthly call option with a 128 strike price (July 28 expiration) came with a premium of around $4.6 per share per contract, or 3.8% of the underlying stock price at the time.

One contract gave the holder the right to buy 100 shares of Crocs at 128 per share. The most that could be lost was $460 — the amount paid for the 100-share contract.

When taking the premium paid into account, CROX stock would have to rally past 132.60 for the trade to start making money (128 strike price plus $4.60 premium per share).

A slightly out-of-the-money call option on Teradyne with a strike price of 115 (Aug. 18 expiration) came with a premium of $3.90 per contract, which was 3.5% of the underlying stock price of 112. TER stock would have to rally past 118.90 (115 strike price plus $3.90 premium per share) to break even. Keep in mind, buying 100 shares or exercising one call option would cost $11,500.

For PulteGroup, a call option with an 80 strike price (July 28 expiration) would cost $1.10 per share, or 1.4% of the underlying stock price of 77.50. The stock would have to rise above 81.10 to make money (80 strike price plus $1.10 premium per share).

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