This is an exciting week for earnings as there are some great trading setups like the ones for Ulta Beauty (NASDAQ:ULTA), Workday (NASDAQ:WDAY), and Best Buy (NYSE:BBY) stock. All three stocks to trade report later in the week and there are opportunities to discuss.
But first we have to place these stocks to trade within the proper framework on Wall Street. The last few days have been violent in the markets. This is due to a whirlwind of headlines.
As a result, equities faltered as the rush for safety trades have taken center stage. Bond yields are still falling into an abyss, which is an unknown that makes most investors nervous.
So in addition to evaluating the validity of the trade setups themselves for ULTA, WDAY, and BBY, we have to also consider the overall moves in the stock market. Nevertheless, there are clues within the individual charts themselves.
In the realm of retail stocks, there aren’t many clear winners. ULTA is one of the few exceptions as they have been able to perform better than Amazon (NASDAQ:AMZN). Year-to-date ULTA stock is up 36% which is double that of Amazon and the S&P 500. Clearly the company is doing something right for investors to give it that much credit in uncertain times.
Similar to Nike (NYSE:NKE), they control their inventory and they have a loyal following. Rarely do they give Wall Street a real reason to sell the stock from internal operation flubs. ULTA stock is not cheap on the face of it. It sports a high-ticket price tag at $330 but that doesn’t mean it is expensive. In fact, it sells at 28 price-earnings ratio and that is modest for how well it is performing.
In short, ULTA stock is worthy of holding for the long-term for as long as this expansion in the U.S. continues. The consumers are employed and they are spending with vigor. And that spells great opportunity for ULTA stock.
The options markets expect a +/- $26 move this week so betting on binary outcome for the short term is not easy to stomach. If I’m long the stock with conviction then the reaction to the earnings report shouldn’t matter all that much. There are some tricks in the options market to protect for free.
For those who are looking to own ULTA stock for the long term, taking a starter position ahead of the earnings is reasonable. If the whole market holds up this week, then ULTA could even rally ahead of the event itself.
Best Buy (BBY)
I have been a critic of BBY stock. I’ve disagreed with Wall Street experts who tout that they have solved the AMZN riddle. The stock action itself reflects the disagreement as it falls in and out of favor among investors.
Best Buy is the only game in town so they should be thriving yet their success is debatable. So there could be something wrong with the setup of BBY business model. This is not to discount the efforts of the company itself, but they are up against some tremendous headwinds.
What works for BBY stock here is that it’s fundamentally cheap. It sells at only 12 price-to-earnings ratio and less than half times its sales. So clearly investors are not giving it a lot of slack. With this little fat built into the stock, the earnings reaction should not be extremely negative.
So if I’m holding the stock, I would be nervous but not enough to panic out of it. The caveat is that BBY management doesn’t deliver a surprise debacle. In that case, if BBY stock loses $62 per share it can trigger a bearish pattern that would target $56 per share. This is not a forecast, but it is a scenario that exists.
Conversely, if the bulls are able to break above $69 per share, Best Buy stock could retest $74, which was the most recent failure level. The problem with this setup is that BBY stock price is stuck between two pivot zones where there is congestion so it’s hard to rally up or down from it. That’s why between this or ULTA, the first would be my favorite bullish trade this week.
The new world order of business is to use the cloud. Salesforce.com (NYSE:CRM) set the standard and since then all companies are striving for it. Amazon built AWS to make that possible. And companies like WDAY are building the applications that implement the transitions.
So these stocks are popular on Wall Street. In fact WDAY stock is outperforming AMZN and CRM this year. So clearly WDAY is in favor even in the face of such market-wide uncertainty.
This is a growth stock so it is not cheap. Buying it here is a bet on its future successes. The company still loses money and WDAY stock sells at 15 times sales. This is a momentum stock so it will run fast in either direction. Overall it has held a nice uptrend.
Workday stock is 14% off of its highs. It also just finished a two-week long consolidation period. This could pose a technical threat in the chart. It is possible that the bears establish a resistance at $200 per share. So sellers could renew another leg lower to push WDAY stock down to $170 which is closer to its point of control.
But the same $200 line could serve as an opportunity for a bullish setup. These are pivotal zones so they can break in either direction, and then they carry momentum through it. Add to that the fact that there is an earnings report coming, and the bet on WDAY stock for this week is completely binary.
But over the long term, the stock is a decent hold because of the potential upside in the space. Short term, I have to accept the risk of short term disappointment over the interpretation of the earnings report. We never know how investors are going to react regardless of the quality of the results.
Although I like the stock here, there is no rush for owning the shares ahead of the earnings. If compelled, I would have a partial position in it. And I would be a buyer on the dips especially near $180 per share.
Since the geopolitical headlines are still flying fast, I don’t take any position in full size. Add to this the fact that ULTA, BBY and WDAY stocks have earnings events this week their short term outcomes are more bets than investing. So I never risk more than I can afford to lose on them.
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