An Earnings Trade Set to 'Pop'

Historically Dr. Pepper Snapple Group sees some fizz in its shares after its quarterly report.
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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


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


(KO) - Get Report



(PEP) - Get Report


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.