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An Earnings Trade Set to 'Pop'

Stocks in this article: DPS KO PEP

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) 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), PepsiCo (PEP) and National Beverage (FIZZ) (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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