Yesterday in my video “3 Picks for an Earnings Blowout” I argued the case that even the 61% second quarter year to year jump in earnings in the Wall Street analyst consensus was unerstated. For example, I noted that the current estimate of $44.91 a share in earnings for the stocks in the Standard & Poor’s 500 was lower than the $49.18 reported in the first quarter–which seems to go against all indications that the economy has continued to improve in the second quarter. Furthermore, in the first quarter a record 59 companies in the S&P 500 had advance guidance that was above Wall Street estimates. That record has already fallen with 66 companies announcing second quarter guidance above Wall Street estimates. There’s a very high likelihood that we’ll see lots of positive earnings surprise in the second quarter earnings season the begins on July 13 when JPMorgan Chase reports earnings before the market opens.
In that video I suggested three stocks JPMorgan Chase (JPM), Taiwan Semiconductor (TSM) and Advanced Micro Devices (AMD) as picks to play that second quarter earnings surprise.
Today I’m adding one of these Advanced Micro Devices to my online portfolio with shares in my 12-18 month Jubak Picks Portfolio and Call Options in my Volatility Portfolio on my subscription site JubakAM.com. I’m adding Advanced Micro Devices rather than JPMorgan Chase because I already own a hunk of bank sector exposure and rather than Taiwan Semiconductor because I already own those shares in my online portfolios and because Advanced Micro Devices seems to have a large number of fans among the momentum crowd to push the shares higher in the short run. (See yesterdays 4.93% gain in the shares as evidence.)
The odds are that Advanced Micro Devices will show huge year to year earnings growth when the company reports on July 23. Wall Street analysts are looking for earnings of 48 cents a share, a huge 270% jump from the 13 cents a share reported in the second quarter of 2020. On the trend, there’s also a very good chance of an earnings surprise for the quarter. In the first quarter of 2021 the company reported an earnings surprise of 23.68%. Historically companies that surprise in one quarter are likely to surprise in the subsequent quarter.
All this has contributed to a huge recent run that has taken the stock from $73.09 on May 13 to a close of $93.34 at the close on July 1. In recent days the stock price has gone parabolic. That would worry me if I was looking for a long-term buy and hold on this stock but its actually encouraging for a short-term trade like the ones I’m putting on tomorrow.
The stocks is by no means all froth, however. The company produces chips that play in some of the hottest parts of current technology (it competes with Nvidia (NVDA) in the market for gaming graphics processing chips) and thanks to troubles at competitor Intel (INTC) Advanced Micro Devices has been picking up share in the x86 server market for data centers. The company’s launch of a 3rd generation EPYC processor in March by itself would have enabled Advanced Micro Devices to pick up share in the relatively risk-averse server CPU market that will break the company’s chips out of the single-digit market share where they’ve been stuck against Intel. But difficulties at Intel have given market share a huge boost at Advanced Micro Devices. The third-generation EPYC chip launched in march was built on Taiwan Semiconductor Manufacturing’s (TSM) 7-nanometer process. Intel’s first 10 nanometer Ice Lake Server CPU wasn’t launched until April and, you’ll note, even the delayed chip uses a larger format than EPCY. Intel has recently announced delays in its Sapphire Rapids next gneration x*^ CPU that look likely to prevent Intel from closing the gap with AMD until 2023. Which is big news indeed consider that server CPUs carry a higher profit market than much of Advanced Micro Devices product line.
I’m adding shares of Advanced Micro Devices to my Jubak Picks Portfolio with a target price of $120 a share. The stock closed at $93.31 on July 1. I’m relatively sure at this point that I won’t be holding this position for the full 12-18 months holding period for this portfolio. In other words this is a trade based on the likelihood that Advanced Micro Devices will surprise on earnings in the next two weeks and that the company is likely to announce higher guidance on revenue and earnings for the next quarter of two.
I’m also adding the Call Options on Advanced Micro Devices to my Volatility Portfolio in order to increase my leverage on a July 27 earnings surprise. The time to buy options on the prospect of an earnings surprise is the two to three weeks before the earnings report date–at least that’s my experience with successful earnings reports option trades on Nvidia in 2019. The pattern is a run up in options prices before the report as traders try to position themselves for the good news and then a drop in the price of the options after the actual report (and in the price of the shares too.) The question is which Call Option. I think the July 23 Call Options are very attractively priced at $4.85 for the strike at $91 and $2.83 for the strike at $95, but I worry about the very short life of these options and the potential volatility of this market. We could get a volatility event that delays the appreciation in the options as the time decay of the options eats away at their price. My preference is the Call Option for September 17 with a strike of $92.50 (AMD210917C0009250) so just slightly in the money at the moment.) I don’t anticipate holding these options to the September expiration and, in fact, I’d be looking for a sell slightly before the July 27 earnings date. The evidence of yesterday and today’s moves in the option prices on gains and losses in the underlying stock argues that the September Call has plenty of leverage to moves in Advanced Micro shares.