GOLDMAN SACHS: These 5 trades can help investors make a killing during a crucial earnings season
- The pace of company earnings is picking up, and Vishal Vivek of Goldman Sachs says the options market is implying that big moves are ahead.
- Vivek is naming five companies that he believes are especially compelling as options trades. All five will report their results in the next month.
- The recommendations are based on options market prices for each company and the potential that they will beat or fall short of consensus estimates.
- Click here for more BI Prime stories.
Traders will be flooded with company earnings reports over the next couple of weeks, and many of them are going to lead to dramatic reactions on Wall Street.
But identifying the best opportunities ahead of those reports isn't easy. Goldman Sachs equity derivatives associate Vishal Vivek says the options market suggests this might be an especially volatile earnings season, and he's naming five stocks that could make big moves.
For all of them, Vivek says Goldman's analysts believe the company might do substantially better or worse than the rest of Wall Street expects, while options prices are fairly low compared to the potential gain for investors. All five of these companies will report earnings in the next month.
(1) Lockheed Martin
Trade: Buy LMT Nov-19 monthly $385 calls recently offered at $8.80
The aerospace and defense giant will report on October 22, and Goldman's analysts expect Lockheed to raise its annual guidance for the second time. They also expect optimistic for 2020 and potentially a bullish cash flow target covering the next three years, and Goldman's price target on the stock implies a 16% rally over the next year.
Despite all of that, Vivek says options prices for Lockheed are down.
(2) Albemarle
Trade: Buy ALB Nov-19 monthly $70 calls recently offered at $2.20
The world's largest lithium miner makes its report on November 7, and Goldman Sachs says Albemarle is holding up very well as its competitors struggle and slash their estimates. Vivek notes that his firm's price target implies 41% upside for Albemarle shares.
"The stock's current valuation levels do not account for the company's best-in-class asset position, its unique long-term, fixed-price contract exposure and the likely continued challenge for the lithium industry to meet expected surging demand trends in the coming years," he wrote in a note to clients.
(3) Gilead Sciences
Trade: Buy GLD Nov-19 monthly $65 puts recently offered at $1.73
The drugmaker reports its earnings on October 24 and Goldman says it faces major challenges. Vivek says it will face a $3 billion headwind when generic versions of its HIV drugs Atripla and Truvada hit the market in September 2020, and Gilead doesn't have enough promising drugs in its pipeline to replace the revenue it will lose when other HIV drugs go off-patent.
Despite those challenges, Vivek says Gilead options prices are about average, and the stock has performed about as well as the broader healthcare sector has this year.
(4) Western Digital
Trade: Buy WDC Nov-19 monthly $60 calls recently offered at $3.70
The hard drive and data storage company is scheduled to make its fiscal first-quarter report on October 30, and Vivek says his firm thinks Wall Street is selling Western Digital short: Goldman's analysts believe it could beat consensus earnings estimates by 20% thanks to better trends in data center business and stabilizing NAND memory pricing.
Vivek adds that options traders are taking a bearish position on Western Digital, as call prices are low. Implied volatility is also low.
(5) Take-Two Interactive Software
Trade: Buy TTWO Nov-19 monthly $125 calls recently offered at $6.05
The publisher of video games including "Grand Theft Auto," "NBA 2K," and "Red Dead" is expected to report fiscal second-quarter results on November 7. Vivek says the company has the potential to beat estimates and has shared early positive feedback about several recent releases.
Over the longer term, he says Take-Two is planning 3 to 5 strong releases a year along with its annual titles, which should help long term growth, while its emphasis on cloud gaming should help its business in China and could attract price-sensitive consumers.
He adds that options prices are low relative to previous earnings periods.