How to Trade Tuesday's Earnings: Goldman Sachs, JPMorgan and More

NEW YORK (TheStreet) -- It is extremely important that investors and traders understand the risk/reward for a stock both before and after a company reports quarterly earnings.

So far in 2014 the Dow Jones Industrial Average is up just 2.2%. Among the index's components, Goldman Sachs (GS) is down 7% year to date, while Johnson & Johnson (JNJ) is up 15% and JPMorgan Chase (JPM) is down 4.6%. These three are among the stocks slated to report earnings before the market opens Tuesday.

Also scheduled to report is regional bank Comerica (CMA), which is up 6.2% so far this year while the regional bank index is up just 2.5%. Community bank Bank of the Ozarks (OZRK) is up 16%, while the ABA Community Bank Index is down 1.4%

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The Dow Transportation Average is up 12% year to date with component JB Hunt (JBHT) down 4.4%.

These pre-earnings volatility differentials are the reason investors and traders need to focus on my two "Crunching the Numbers" tables, which provide current readings for both stock-specific fundamental data and simple readings of technical analysis.

The most important parts of the second table are action levels: value levels at which to buy on weakness and risky levels at which to sell on strength.

Let's take a look at the stock profiles: All six companies report quarterly results before the opening bell on Tuesday.

Comerica ($50.47) traded as high as $53.50 on March 21 and as low as $45.34 on May 15, when it tested its 200-day simple moving average, which is now up to $46.91. Analysts expect the bank to report earnings per share of 76 cents. The company's 12-month trailing price-to-earnings ratio is 16.6 with a dividend yield of just 1.6%.

The weekly chart is positive with a five-week modified moving average at $49.75. Semiannual value levels are $45.34 and $41.89 with quarterly and monthly risky levels at $53.31 and $53.70, respectively.

Goldman Sachs ($164.80) has been trading back and forth around its 200-day SMA since Feb. 3 and closed Friday just above this average at $164.76. Analysts expect the investment bank to report EPS of $3.07. The stock's 12-month trailing P/E ratio is 13.1, and its dividend yield is just 1.3%.

Goldman's weekly chart shifts to positive given a close this week above its five-week MMA at $165.13. A semiannual value level is $153.50 with monthly and weekly risky levels at $171.38 and $174.69, respectively.

JB Hunt ($73.89) has been shifting lanes back and forth around its 200-day SMA since Jan. 29 and closed on Friday in the exit lane below this average at $74.66. Analysts expect the trucker to report EPS of 79 cents. The stock's 12-month trailing P/E is elevated at 25.6, and it has a dividend yield of just 1.1%.

The weekly chart is negative with its five-week MMA at $75.07. An annual value level is $67.62 with weekly and monthly risky levels at $74.50 and $76.03, respectively.

Johnson & Johnson ($105.10) helped the Dow set its all time high at 17,074.65 on July 3 with an all-time intraday high at $106.74 on July 7, well above its 200-day SMA at $95.58. Analysts expect the large-cap pharmaceutical company to report EPS of $1.54. The stock's 12-month trailing P/E is 18.5, and it has a dividend yield of 2.7%.

The weekly chart is positive but overbought with its five-week MMA at $103.34. Monthly and semiannual value levels are $102.69 and $101.33, respectively, with weekly and monthly risky levels at $108.03 and $108.81, respectively.

JPMorgan ($55.80) has been trading back and forth around its 200-day SMA since April 11 and ended Friday below its 200-day at $56.16. Analysts expect the nation's biggest "too big to fail" bank to report EPS of $1.30. The stock's 12-month trailing P/E ratio is 10.3 and its dividend yield is 2.9%.

The weekly chart is neutral with its five-week MMA at $56.49 and a declining 12x3x3 weekly slow stochastic. Annual value levels are $50.39 and $46.45 with semiannual and weekly risky levels at $57.39 and $59.73, respectively.

Bank of the Ozarks ($32.80) set an all-time intraday high at $35.24 on March 20 then traded as low as $27.51 on May 15, holding its 200-day SMA, which is now higher at $29.37. Analysts expect the community bank to report EPS of 33 cents. The stock's 12-month trailing P/E ratio is elevated at 25, and it has a dividend yield of just 1.5%.

The weekly chart is positive with its five-week MMA at $32.26. Semiannual and annual value levels are $28.52 and $19.47, respectively, with a semiannual pivot at $32.61 and weekly and quarterly risky levels at $35.39 and $36.29, respectively.

Crunching the Numbers With Richard Suttmeier: Moving Averages & Stochastics

This table provides the technical status for the stocks profiled in today's report.

There are five columns with moving average titles: Five-Week Modified Moving Average; 21-Day Simple Moving Average; 50-Day Simple Moving Average; 200-Day Simple Moving Average; and the 200-Week Simple Moving Average.

The column labeled 12x3x3 Weekly Slow Stochastics shows the pattern on each weekly chart with a reading of oversold, rising, overbought, declining or flat.

Interpretations: Stocks below a moving average are listed in red.

Five-Week Modified Moving Average (MMA) is one of two indicators that define whether a weekly chart profile is positive, neutral or negative. The other is the status of the 12x3x3 weekly slow stochastic.

A stock with a positive technical rating is above its five-week MMA with rising or overbought stochastics.

A stock with a negative technical rating is below its five-week MMA with declining or oversold stochastics.

A stock with a neutral technical rating has a profile that is not positive or negative.

The 200-Week Simple Moving Average (SMA) is considered a long-term technical support or resistance level and as a "reversion to the mean" over a rolling three- to five-year horizon. 

The 21-Day Simple Moving Average is a short-term technical support or resistance used by many hedge fund traders to adjust positions. A stock above its 21-day SMA will likely move higher over a rolling three- to five-day horizon and vice versa.

The 50-Day Simple Moving Average is also a technical support or resistance used by many strategists and commentators in financial TV.

The 200-Day Simple Moving Average is another technical support or resistance level, and I consider this level as a shorter-term "reversion to the mean" over a rolling six- to 12-month horizon. (Even Apple tested or crossed its 200-day SMA in nine of the last 10 years.)

Crunching the Numbers With Richard Suttmeier: Earnings & Where to Buy & Where to Sell

This table presents the EPS estimates including date and before or after the close, and where to buy on weakness and where to sell on strength.

"EPS Date" is the day the company reports its quarterly results.

"EPS Estimate" is the EPS estimate from Wall Street analysts.

Value Levels, Pivots and Risky Levels are calculated based upon the last nine weekly closes (W), nine monthly closes (M), nine quarterly closes (Q), nine semiannual closes (S) and nine annual closes (A). I have one column for pivots, which is a magnet for the period shown. The columns to the left of the pivots are first and second value levels. The columns to the right of the pivots are first and second risky levels.

Investors who wish to buy a stock should use a good-'til-canceled limit order to buy weakness to a value level. Investors who want to sell a stock should use a GTC limit order to sell strength to a risky level.

At the time of publication the author held no positions in any of the stocks mentioned.

Follow @Suttmeier

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff


Now let's look at TheStreet Ratings' take on some of these stocks.

TheStreet Ratings team rates JPMORGAN CHASE & CO as a Buy with a ratings score of B+. TheStreet Ratings Team has this to say about their recommendation:

"We rate JPMORGAN CHASE & CO (JPM) a BUY. This is driven by a few notable strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its attractive valuation levels, expanding profit margins and increase in stock price during the past year. We feel these strengths outweigh the fact that the company has had sub par growth in net income."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The gross profit margin for JPMORGAN CHASE & CO is currently very high, coming in at 88.15%. Regardless of JPM's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 20.99% trails the industry average.
  • JPMORGAN CHASE & CO's earnings per share declined by 19.5% in the most recent quarter compared to the same quarter a year ago. The company has suffered a declining pattern of earnings per share over the past year. However, we anticipate this trend reversing over the coming year. During the past fiscal year, JPMORGAN CHASE & CO reported lower earnings of $4.32 versus $5.19 in the prior year. This year, the market expects an improvement in earnings ($5.29 versus $4.32).
  • JPM, with its decline in revenue, slightly underperformed the industry average of 2.6%. Since the same quarter one year prior, revenues slightly dropped by 9.0%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.
  • In its most recent trading session, JPM has closed at a price level that was not very different from its closing price of one year earlier. This is probably due to its weak earnings growth as well as other mixed factors. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.

TheStreet Ratings team rates GOLDMAN SACHS GROUP INC as a Buy with a ratings score of B+. TheStreet Ratings Team has this to say about their recommendation:

"We rate GOLDMAN SACHS GROUP INC (GS) a BUY. This is driven by a few notable strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its attractive valuation levels, expanding profit margins, good cash flow from operations and increase in stock price during the past year. We feel these strengths outweigh the fact that the company has had sub par growth in net income."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • 44.86% is the gross profit margin for GOLDMAN SACHS GROUP INC which we consider to be strong. It has increased from the same quarter the previous year. Along with this, the net profit margin of 18.67% is above that of the industry average.
  • Net operating cash flow has increased to -$4,221.00 million or 25.92% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of 15.20%.
  • GS, with its decline in revenue, slightly underperformed the industry average of 5.1%. Since the same quarter one year prior, revenues slightly dropped by 7.5%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.
  • In its most recent trading session, GS has closed at a price level that was not very different from its closing price of one year earlier. This is probably due to its weak earnings growth as well as other mixed factors. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.

Richard Suttmeier is the chief market strategist at ValuEngine.com. He has been a professional in the U.S. Capital Markets since 1972, transferring his engineering skills to the trading and investment world.

Suttmeier has an engineering degree from Georgia Tech and a Master of Science degree from Brooklyn Poly. He began his career in the financial services industry in 1972 trading U.S. Treasury securities in the primary dealer community. He became the first long bond trader for Bache in 1978, and formed the Government Bond Department at LF Rothschild in 1981, helping establish that firm as a primary dealer in 1986. This experience gives him the insights to be an expert on monetary policy, which he features in his newsletters, and market commentary.

Suttmeier's industry licenses include, Series 7 and Registered Principal (Series 24). He has been the Chief Market Strategist for ValuEngine.com since 2008 and often appears on financial TV.

Click here for details on Suttmeier's "Buy and Trade" investment strategy.

Richard Suttmeier can be reached at RSuttmeier@Gmail.com

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