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An Earnings Disappointment Creates a Potential 70% Gain

An Earnings Disappointment Creates a Potential 70% Gain

Earnings usually beat expectations and that makes misses potentially profitable. An example can be found in a recent report as PR Newswire recently noted, “Globant (NYSE: GLOB), a digitally native technology services company, announced results for the three and nine months ended September 30, 2019.

Third quarter 2019 highlights

  • Revenue rose to $171.3 million, representing 27.3% year-over-year growth compared to the third quarter of 2018.
  • IFRS Gross Profit margin was 38.7% compared to 39.5% in the third quarter of 2018.
  • Non-IFRS Adjusted Gross Profit Margin was 40.6% compared to 41.2% in the third quarter of 2018.
  • IFRS Profit from Operations Margin was 13.4% compared to 14.1% in the third quarter of 2018.
  • Non-IFRS Adjusted Profit from Operations Margin was 18.1% compared to 17.3% in the third quarter of 2018.
  • IFRS Diluted EPS was $0.40, compared to $0.42in the third quarter of 2018. Non-IFRS Adjusted Diluted EPS was $0.62, compared to $0.46 in the third quarter of 2018.

“Third quarter 2019 was another robust quarter for Globant in terms of revenues and profitability. Our revenues reached a new quarterly record of $171.3 million, representing a solid 27.3% year over year growth.” said Martín Migoya, Globant’s CEO and co-founder.

“Consumer expectations are going faster than technology, continuing to expand the market opportunity. According to a Globant study, 87% of organizations are currently pursuing a digital transformation initiative, but only one third say they are innovative and their digital maturity is cutting edge,” added Martín Migoya.

“As a pure play in digital and cognitive transformation, we are ready to help companies reinvent themselves to face these future challenges. By leveraging technologies like AI we can augment the organizations’ capabilities to enhance their business models, internal experiences, and processes.”

“I am very pleased with our third quarter financial performance. During this quarter we delivered solid revenue growth while improving our operating and net income margins. Additionally, net additions of Globers continue to be strong, combined with further decrease in attrition levels,” explained Juan Urthiague, Globant’s CFO.

Globant completed the third quarter with 11,283 Globers, 10,462 of whom were technology, design and innovation professionals. The geographic revenue breakdown for the third quarter was as follows: 77.1% from North America (top country: US), 17.0% from Latin America and others (top country: Argentina) and 5.9% from Europe (top country: Spain). In terms of currencies, 86.3% of Globant’s revenues for the third quarter was denominated in US dollars.

During the last twelve months ended September 30, 2019, Globant served 744 customers, 104 of which accounted for more than $1 million of Globant’s revenues. Globant’s top customer, top five customers and top ten customers represented 11.9%, 26.1% and 38.6% of third quarter revenues, respectively.

Cash and bank balances and Investments as of September 30, 2019 amounted to $59.5 million and current assets amounted to $246.4 million, accounting for 38.7% of total assets for the same period. Finally, as of September 30, 2019, 36.8 million common shares were issued and outstanding.

The company also updated its outlook:

  • Fourth quarter 2019 Revenues are estimated to be between $182-$184 million, implying 30.6% year-over-year growth at the midpoint of the range.
  • Fourth quarter 2019 Non-IFRS Adjusted Diluted EPS is estimated to be in the range of $0.58-$0.62(assuming an average of 38.0 million diluted shares outstanding during the fourth quarter).
  • Fiscal year 2019 Revenues are estimated to be in the range of $657-$659 million, implying 26.0% year-over-year revenue growth at the midpoint of the range.Fiscal year 2019 Non-IFRS Adjusted Diluted EPS is estimated to be in the range of $2.23-$2.27(assuming an average of 37.7 million diluted shares outstanding during 2019).”

The stock fell on the news.

GLOB daily chart

The decline could mark a failed attempt to break through resistance.

GLOB weekly chart

A Trading Strategy To Benefit From Weakness

A price decline often results in higher than average options premiums. That means option buyers will be forced to pay higher than average prices for trades, But, sellers could benefit from the higher premiums.

In this case, with a bearish outlook for the short term, a call option should be sold. The call should decline in value if the stock declines and sellers of calls benefit from this decline.

Selling options can involve a great deal of risk. A spread options strategy can be used to limit the potential risk of the trade.

One strategy that traders can consider is the bear call spread. This is a trade that uses two calls with the same expiration date but different exercise prices.

Traders buy one call and sell another call. The exercise price of the call you sell will be below the exercise price of the long call. The call is sold to limit the risk of the trade. So, this strategy will always generate a credit when it is opened and will always have limited risk.

The risk profile of this trading strategy is summarized in the diagram below which shows the limited risk and reward.

bear call spread

Source: The Options Industry Council

While risks and rewards are limited, this strategy will allow traders to generate potential gains in a stock they might otherwise find too risky to trade. Many individuals ignore bearish strategies because of the risks.

You’ll know the maximum potential gain with this strategy as soon as it’s opened. It is equal to the amount of premium received when the trade is opened. The maximum loss is equal to the difference between the exercise price of the options contracts less the premium received and is also known.

Every day, we scan the markets looking for trades that carry 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.

A Bear Call Spread in GLOB

For GLOB, we could sell a December 20 $100 call for about $4.21 and buy a December 20 $105 call for about $2.15. This trade generates a credit of $2.06, which is the difference in the amount of premium for the call that is sold and the call.

Remember that each contract covers 100 shares, opening this position results in immediate income of $206. The credit received when the trade is opened, $206 in this case, is also the maximum potential profit on the trade.

The maximum risk on the trade is about $294. The risk can be found by subtracting the difference in the strike prices ($500 or $5.00 times 100 since each contract covers 100 shares) and then subtracting the premium received ($206).

This trade offers a potential return of about 70% of the amount risked for a holding period that is relatively brief. This is a significant return on the amount of money at risk. This trade delivers the maximum gain if GLOB is below $100 when the options expire, a likely event given the stock’s trend.

Call spreads can be used to generate high returns on small amounts of capital several times a year, offering larger percentage gains for small investors willing to accept the risks of this strategy. Those risks, in dollar terms, are relatively small, about $294 for this trade in GLOB.