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An Earnings Trade Set to 'Pop'

By Chris Johnson and Jon Lewis of InvestorPlace

When looking for earnings trades, one factor we consider is how a stock historically does after earnings. Consistency, either up or down, is the key. Most stocks have mixed results -- down one quarter and up the next.

Dr. Pepper Snapple Group (DPS - Get Report) is one of those reliable stocks. First, it consistently beats earnings estimates. Its current string is six in a row. Analysts expect an 11% growth in profits over last year, which hardly seems excessive. So we're counting on seven in a row.

Second, the stock has performed quite well following recent earnings reports. Take the past four quarters. The shares have risen sharply three times by an average of around 11% in the week following earnings. The other quarter resulted in a slight loss. Such moves are just what option buyers need for successful trades.

Competitors in the soft drink field have done well so far this quarter, with Coca-Cola (KO - Get Report), PepsiCo (PEP - Get Report) and National Beverage (FIZZ - Get Report) (Faygo and Shasta brands) posting solid increases in sales and profits. With DPS expanding its reach through distribution deals with its bigger rivals and a larger presence within the fast-food industry, look for the company to impress when it reports earnings before the open next Thursday (7/29).

On the charts, DPS has been a steady performer, having managed to gain ground without the wild swings common to most stocks these days. The shares have been steadily climbing along the tandem support of their 20-day and 50-day moving averages to reach an all-time high around the 40 mark. With no overhead resistance, the post-earnings path seems clear.

Sentiment is not really a factor in this trade. Our indicators show mostly optimism toward DPS, which is to be expected given the stock's performance. But sentiment is far from being so over-the-top bullish that would cause us concern.

Given its recent post-earnings success and the numbers posted by competitors, we expect DPS to come in with a solid report next week. That should be enough to propel the stock to new record-high territory.

Play the in-the-money August 35 call, which has a more advantageous bid/ask spread than the out-of-the-money 40 call.

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SYM TRADE IT LAST %CHG
DPS $80.22 0.00%
FIZZ $23.77 0.00%
KO $41.08 0.00%
PEP $96.35 0.00%
AAPL $121.30 0.00%

Markets

Chart of I:DJI
DOW 17,689.86 -56.12 -0.32%
S&P 500 2,103.84 -4.79 -0.23%
NASDAQ 5,128.2810 -0.5040 -0.01%

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