MU Stock Climbs Off Lows Amid Earnings Optimism; Chip Leader AEHR Scores New High Ahead Of Results

Micron (MU) is set to report earnings, along with Aehr Test Systems (AEHR), one of the strongest performers in the chip-equipment group. MU stock has come off lows, but the provider of memory and storage solutions has had a hard time keeping up with leaders in the semiconductor sector.

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Other firms on the week’s earnings calendar include Carnival (CCL) and Lululemon Athletica (LULU).

Carnival has the look of a turnaround story post-Covid as business slowly returns to normal. CCL stock looked like it was ready to outperform when shares jumped nearly 5% on Feb. 1 in higher volume. But sellers have been in control ever since.

Results are due Monday before the open. Revenue growth has surged in recent quarters, mostly due to easy comparisons, but demand is also picking up. Shares jumped on Dec. 21 after the company reported a 198% jump in revenue. At the time, the company cited strong advance bookings in November and December. Revenue for the current quarter is seen vaulting 168% to $3.45 billion, according to Zacks.

For its current fiscal year 2023, the company is expected to report a loss of 7 cents share, with a return to profitability in fiscal 2024.

MU Stock In Rally Mode

Micron’s earnings report, due Tuesday after the close, will be closely watched by technology investors. The company’s report in December didn’t go over well with Wall Street as the company reported a wider-than-expected loss and revenue slightly below expectations. Micron also forecast a larger-than-expected loss for the February-ended quarter and revenue growth slightly ahead of expectations.

CEO Sanjay Mehrotra cited too much memory supply and not enough demand, resulting in higher inventories. PC sales have been slowing, with sluggish server sales expected this year, although Mehrotra said free cash flow along with revenue should start to recover before the end of the year.

For the next quarterly report, look for an adjusted loss of 66 cents a share, with revenue down 51% to $3.76 billion.

Aehr Test Systems And Lululemon On Deck

In the chip-equipment group, Aehr Test Systems isn’t suffering from soft demand, particularly when it comes to testing equipment for the automotive and mobility integrated circuit markets.

The stock soared Tuesday on news the company received a big order from a major silicon carbide customer. Aehr shows big earnings increases in recent quarters along with bullish annual earnings estimates.

But growth is expected to slow in the current quarter, with adjusted profit up 14% to 16 cents a share. Revenue growth is also expected to slow, up 11% to $17 million. Results are due Thursday after the close.

For its current fiscal year ending in May, annual earnings are expected to jump 43%, with growth accelerating in fiscal 2024, up 83%. Estimates have been heading higher.

Meanwhile, sellers have dictated the action in Lululemon in recent months, knocking LULU stock more than 20% off its high.

The weakness comes despite an outstanding track record of bottom-line and top-line growth.

Results are due Tuesday after the close. Adjusted profit is seen rising 26% to $4.25 a share, with revenue also up 26% to $2.69 billion.

Options Trading Strategy

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 MU stock.

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 lines 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.

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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.

See Which Stocks Are In The Leaderboard Portfolio

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.

MU Stock Option Trade

Here’s how a recent call option trade looked for Micron.

When MU stock traded around 61 Friday morning, a slightly out-of-the-money weekly call option with a 62 strike price (March 31 expiration) came with a premium of around $1.90 per contract, or 3.1% of the underlying stock price at the time.

One contract gave the holder the right to buy 100 shares of Micron stock at 62 per share. The most that could be lost was $280 — the amount paid for the 100-share contract.

When taking the premium paid into account, Micron stock would have to rally past 63.90 for the trade to start making money (62 strike price plus $1.90 premium per contract).

Follow Ken Shreve on Twitter @IBD_KShreve for more stock market analysis and insight.

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