Software giants Oracle (ORCL) and Adobe (ADBE) are next up on the earnings docket as major stock indexes seek a bottom. Oracle stock gapped up in June when it last reported earnings. After a pullback, it’s now testing a key support level. But Adobe stock recently fell below the 400 level as it shows signs of institutional selling.
Oracle stock has a Composite Rating of 71, weighed down in part by lagging price performance over the past 12 months. Adobe stock has an SMR Rating of A, helped by a consistent track record of sales, healthy profit margins and annual return on equity.
Oracle Stock Tests Key Level
Oracle stock surged June 14 on better-than-expected earnings and sales. Adjusted profit of $1.54 a share was flat from the year-ago quarter, but it was nicely ahead of the consensus estimate of $1.37. Sales increased 5% to $11.8 billion, thanks to strength in the company’s cloud infrastructure business. The unit showed a 39% jump in sales, which lifted total cloud sales by 19% to $2.9 billion.
“We believe that this revenue growth spike indicates that our infrastructure business has now entered a hypergrowth phase,” Oracle CEO Safra Catz said in a statement.
For the current quarter, the Zacks consensus estimate is for adjusted profit of $1.07 a share, up 4% from the year-ago quarter. Sales are expected to jump 18% to $11.47 billion, helped by Oracle’s $28 billion acquisition of health care IT firm Cerner. The deal closed in June.
Oracle stock is trading near its 10-week moving average after a nice rally off lows, although the stock’s 40-week line is a potential resistance level. Oracle stock got turned away at the 40-week line last month.
The company releases its August-quarter results Monday after the close.
Adobe Trends Lower
Sellers hit Adobe stock in June even though earnings and sales growth accelerated from the prior quarter.
Adjusted profit increased 11% from the year-ago quarter to $3.35 a share. Sales rose 14% to nearly $4.39 billion. But a pickup in growth from fiscal Q1 was offset by lowered full-year earnings and sales guidance. The company forecast full-year profit of $13.50 a share and full-year sales of $17.65 billion, down slightly from prior guidance of $13.70 a share and sales of $17.9 billion.
Despite currency headwinds, Adobe’s Digital Media segment, which includes Creative Cloud and Document Cloud products, delivered sales of $3.2 billion, up 15%. Adobe ended the quarter more than $5 billion in cash.
Results from Adobe are due Thursday after the close. The Zacks consensus estimate is for adjusted profit of $3.33 a share, up 7%, with sales up 13% to $4.43 billion.
Adobe’s Accumulation/Distribution Rating has dropped to D+, hurt by signs of institutional selling in late August, when the stock marked a few price declines in above-average volume.
Options Trading Strategy
A basic options trading strategy around earnings using call options allows you to buy a stock at a predetermined price without taking a lot of risk. Here’s how the options trading strategy works.
First, identify top-rated stocks with a bullish chart. Some might be setting up in sound early-stage bases. Others might already have broken out and are getting support at their 10-week lines for the first time. Some might be trading tightly near highs and refusing to give up much ground. Oracle stock is still far off highs, but another quarter of strong cloud growth could fuel another round of buying. Avoid extended stocks that are too far past proper entry points.
In options trading, a call option is a bullish bet on a stock. Put options are bearish bets. One call option contract gives the holder the right to buy 100 shares of a stock at a specified price, known as the strike price.
Put options are for weak performers with bearish charts. The only difference is that an out-of-the-money strike price is just below the underlying stock price. A put option gives the holder the right to sell 100 shares of a stock at a specified price. You earn profits when the stock falls below the strike price with a put option.
Check Strike Prices
Once you’ve identified an earnings setup for a call option, like Oracle stock, check strike prices with your online trading platform or at cboe.com. Make sure the option is liquid, with a relatively tight spread between the bid and ask. Look for a strike price just above the underlying stock price (out of the money) and check the premium. The premium ideally should not exceed 4% of the underlying stock price at the time. In some cases, an in-the-money strike price is OK as long as the premium isn’t too expensive.
Choose an expiration date that fits your risk objective. But keep in mind that time is money in the options market. Near-term expiration dates will have cheaper premiums than those further out. Buying time in the options market comes at a higher cost.
This options trading strategy lets you capitalize on a bullish earnings report without taking too much risk. Risk is equal to the cost of the option. If the stock gaps down on earnings, the most that can be lost is the amount paid for the contract.
Oracle Stock Option Trade
Oracle is very liquid in the options market.
When Oracle stock traded around 74.50, a slightly out-of-the-money weekly call option with a 75 strike price (Sept. 16 expiration) came with a premium of around $2.10, or 2.8% of the underlying stock price at the time.
One contract gave the holder the right to buy 100 shares of Oracle stock at 75 per share. The most that could be lost was $210 — the amount paid for the 100-share contract.
When taking the premium paid into account, Oracle would have to rally past 76.60 for the trade to start making money (75 strike price plus $2.10 premium per contract).
Follow Ken Shreve on Twitter @IBD_KShreve for more stock market analysis and insight
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