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A Trade For After an Earnings Driven Double Digit Gain

A Trade For After an Earnings Driven Double Digit Gain

Some companies make big jumps and a little research can reveal that the reason is obviously news. As PR Newswire reported, “ManpowerGroup Inc. (NYSE: MAN) recently reported first-quarter net income of $53.5 million.

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  • On a per-share basis, the company said it had profit of 88 cents. Earnings, adjusted for restructuring costs, were $1.39 per share.

    The results beat Wall Street expectations. The average estimate of six analysts surveyed by Zacks Investment Research was for earnings of $1.35 per share.

    The staffing company posted revenue of $5.04 billion in the period, also surpassing Street forecasts. Four analysts surveyed by Zacks expected $4.92 billion.

    The company added, “The current year quarter included restructuring costs which reduced earnings per share by 51 cents.

    Financial results in the quarter were also impacted by the stronger U.S. dollar relative to foreign currencies compared to the prior year period. On a constant currency basis, revenues decreased 2% and net earnings per diluted share decreased 34%, or 12% excluding the impact of restructuring costs.

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  • Earnings per share in the quarter were negatively impacted 7 cents by changes in foreign currencies compared to the prior year, or 12 cents excluding the restructuring costs.

    Jonas Prising, ManpowerGroup Chairman & CEO, said, “Our global team executed well and delivered solid first quarter results against the backdrop of a slow global growth environment.

    Demand for our extensive portfolio of workforce solutions and services across our global footprint provides us with good opportunities for profitable growth going forward.”

    “We anticipate diluted earnings per share in the second quarter will be between $1.96 and $2.04, which includes an estimated unfavorable currency impact of 10 cents.”

    The stock soared on the news. The chart below shows the stock pushed above an important resistance level and completed an extended bottoming pattern that extends back into the final months of 2018.

    MAN daily chart

    A longer-term chart reveals that the move leaves the stock well below its all time high and there is most likely significant up side potential in MAN, even after the short-term bounce that followed the earnings announcement.

    MAN weekly chart

    A Trade for Short Term Bulls

    As with the ownership of any stock, buying MAN could require a significant amount of capital and exposes the investor to standard risks of owning a stock.

    To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.

    Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will usually be relatively small to own an option.

    To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.

    This strategy is designed to profit from a gain in the underlying stock’s price but has the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.

    bull call spread

    Source: The Options Industry Council

    Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.

    This strategy could be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.

    A Specific Trade for MAN

    Every day, we scan the markets looking for trades that MAN low risk and high potential rewards. These trades are available almost every day and we share them with you as we find them. Now, it’s important to remember these are trading opportunities in volatile stocks.

    When we find a potential opportunity, we evaluate it with real market data. But because the trades are volatile, the opportunities may differ by the time you read this. To help you evaluate the current opportunity, we show our math and explain the strategy.

    For MAN, the June 21 options allow a trader to gain exposure to the stock.

    A June 21 $100 call option can be bought for about $2.15 and the June 21 $105 call could be sold for about $0.80. This trade would cost $1.35 to open, or $135 since each contract covers 100 shares of stock.

    The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.

    In this trade, the maximum loss would be equal to the amount spent to open the trade, or $135

    The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.

    For this trade in MAN the maximum gain is $3.65 ($105 – $100 = $5; $5 – $1.35 = $3.65). This represents $365 per contract since each contract covers 100 shares.

    Most brokers will require minimum trading capital equal to the risk on the trade, or $135 to open this trade.

    That is a potential gain of about 170% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.

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