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Weak Earnings Could Be a Winner For Investors

Weak Earnings Could Be a Winner For Investors

Wintrust Financial Corp (NASDAQ: WTFC) reported first-quarter EPS at $1.52. That was in line with consensus expectations, according to Yahoo Finance.

Excluding negative mortgage servicing rights (MSR) valuation adjustments, the quarterly EPS would have meaningfully beaten expectations, backed by higher non-interest income and lower operating expenses. This seemed to drive selling pressure and a decline in the stock.

WTFC daily chart

Wintrust Financial recognized a negative MSR valuation adjustment of $8.7 million in the first quarter, which had an adverse impact of 12 cents per share on the EPS, Raymond James’ David Long said.

The positives in the quarter included an equity securities gain of $1.4 million and a forex remeasurement gain of $0.5 million.

The company’s NIM (net interest margin) expanded 9bps sequentially and was ahead of the consensus estimate. Trust and asset management fees were also higher than expected, Long noted.

Wintrust Financial recorded deposit growth of 2.7 percent, driven by strong wealth management and money market deposit growth. The company was able to control employee expenses and professional fees, which resulted in lower-than-expected operating expenses for the quarter.

Net interest income came in higher than Street projections. Although mortgage banking disappointed, the lower rates bode well for mortgage volume through the rest of 2019, the analyst said.

Long believes there’s room for upward revisions to the Street’s EPS estimate for 2019, to reflect expectations of NIM expansion, strong deposit growth, acceleration in mortgage volume and controlled operating expenses.

According to Global Newswire, Edward J. Wehmer, President and Chief Executive Officer, noted, “The first quarter was characterized by net interest margin expansion, loan and deposit growth, stable credit quality, market volatility impacting the mortgage division and cost control.”

Turning to the future, Mr. Wehmer stated, “We believe 2019 got off to a strong start as we grew assets significantly while expanding net interest margin, maintaining strong credit quality and managing operating costs.  We expect continued organic growth in all areas of our businesses.

We will remain diligent in monitoring changes to the interest rate environment and managing the balance sheet to maximize net interest margin and net income.”

The decline could indicate a failure at an important resistance level that can be seen on the longer-term chart. Long-term share holders could be frustrated by the price action and add to the selling pressure.

WTFC 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 WTFC

For WTFC, we could sell a June 21 $75 call for about $3.70 and buy an June 21 $80 call for about $1.40. This trade generates a credit of $2.30, 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 $230. The credit received when the trade is opened, $230 in this case, is also the maximum potential profit on the trade.

The maximum risk on the trade is about $270. 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 ($230).

This trade offers a potential return of about 85% 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 WTFC is below $75 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 $270 for this trade in WTFC.