The charts of the FAANG stocks have left something to be desired over the past several months.  Streaming giant Netflix (NFLX) is a prime example. The stock managed to recover nearly all of its late 2018 losses in the first half of 2019, but it gave up the ghost in the wake of July’s earnings report when the company missed subscriber estimates. NFLX has remained in a downtrend in the months since with a recent lower low around support near last November’s lows. Granted, this recent low was still 8.9% above the 52-week low from Christmas Eve of last year.  Now at the top of this downtrend, NFLX reports earnings once again tonight after the close and given its historical volatility around earnings, the stock has an opportunity to either break out or break down.

Although the 10.27% one-day decline in response to the last quarter’s report that preceded NFLX’s recent downtrend may sound bad, the move was basically par for the course. Netflix is one of the most volatile stocks on earnings with shares averaging an absolute move the day after earnings of 12.78% across all quarters since 2002. So last quarter’s decline was actually smaller than the average! As shown in the table from our Earnings Explorer tool below, that was the worst full-day decline in reaction to earnings since Q2 2016, but there was actually a larger gap down at the open just one year prior in July of 2018; although most of that decline was regained intraday. Headed into tomorrow, it should come as no surprise to investors if the stock swings wildly regardless of what the results of the quarter are. EPS is estimated to come in at $1.05 and sales are expected to grow to $5,247.5 million.

Looking at the historical trends of NFLX’s beat rates, last quarter’s revenue miss could have been expected.  NFLX has only exceeded Q2 revenue estimates 33% of the time.  The other three quarters have much stronger beat rates. As for today, the third quarter’s revenue beat rate is the second strongest at 70.59%, only behind the first quarter’s 76.47% beat rate. When Netflix has beaten revenue estimates in the third quarter, it has averaged a one-day share price gain of 2.74% with the stock positive two-thirds of the time. On the other hand, when there is a revenue miss in the third quarter, the stock has always declined, averaging -12.3%.

With regards to EPS beat rates, Netflix most consistently exceeds expectations in the fourth quarter having done so 94.12% of the time.  Other quarters are a bit weaker in the low-80% range. For the third quarter, as with the first quarter, NFLX has beaten EPS 82.35% of the time.

Looking at the average stock price reaction to earnings, last quarter’s decline again could have been expected as the second quarter has averaged the largest gap down, decline from open to close, and full-day decline of any quarter. Third-quarter results have only been slightly better as NFLX averages a gap down of 2.8% and a full day decline of 1.17%. One silver lining, though, is that the third quarter is the only quarter that has seen the stock rise on average (1.4%) from the open to the close after its initial opening gap. Meanwhile, the fourth quarter has typically seen the strongest overall performance with an average gap up of 12.4% and full-day gain of 11.2%. Start a two-week free trial to Bespoke Institutional to access our interactive Earnings Explorer and much more.

Homebuilder sentiment came in significantly better than expected in October rising from 68 up to 71 compared to expectations for the index to remain unchanged at 68.  With October’s gain, overall sentiment is currently at its best level since February 2018.  Also notable is the fact that over the last ten months, the NAHB Homebuilder Sentiment index is up 15 points.  That’s the strongest ten-month rate of change in more than six years.   With homebuilder sentiment so strong, it’s hard to imagine that the economy is on the cusp of a downturn.

Looking at the internals of the report, strength was broad-based at a national level as Present and Future Sales as well as Traffic all saw impressive gains.  On a regional level, though, it was a bit of a mixed picture.  While sentiment in the South and West increased, sentiment in the Northeast and Midwest declined.  In the case of the South, though, sentiment hit its highest level since June 2005 (chart below)! Start a two-week free trial to Bespoke Premium to sample our actionable research.  If you use this checkout link, you’ll receive a 10% discount on an annual membership if you stick with it past your trial period.

Semiconductors outperformed the overall market on Tuesday (10/15), with the Philadelphia Semiconductor index (SOX) rallying 2.22%.  The chart below shows the performance of the SOX over the last year, and while you have to squint, Tuesday’s move saw new all-time highs on both a closing and intraday basis.  What’s really amazing about this chart is that while the current high represents the third higher high for the SOX since its peak earlier this year in April, the percentage spread between the April high and Tuesday’s high is just 1.6%.  Or to put it another way, July’s high was 1.28% above the April high, September’s high was 0.003% above July’s high, and the current high is just 0.3% above the September high.  It doesn’t get much more narrow than that!

While the SOX hit a new high Tuesday, only a handful of names in the index managed to do so as well.  The chart below shows how far each stock in the index finished the day from its 52-week high.  Of the 30 stocks in the index, just seven (less than a quarter) hit new highs.  Besides the seven new highs (shaded in the chart below), there are only six other stocks in the SOX that are within 5% of a 52-week high, so more than half of the index’s components are more than 5% below 52-week highs.  Stocks that are the furthest below their respective highs are Xilinx (XLNX), Cree (CREE), and NVIDIA (NVDA).  All three of these names are still down more than 20% from their respective highs, while other big names in the index like QUALCOMM (QCOM), Advanced Micro (AMD), Intel (INTC), and Broadcom (AVGO) are still down over 10% from 52-week highs.  So there’s still room for upside in the index if these big names can play more catch up.

The table below lists each of the 30 stocks comprising the SOX along with their YTD change through 10/15.  So far this year, the average YTD performance of the stocks in the SOX is a gain of 43%!  The top-performing stocks in the index so far have been Teradyne (TER), which has nearly doubled, KLA-Tencor (KLAC), and Lam Research (LRCX).  All three are up over 75% YTD.  On the downside, there aren’t any, but Semtech (SMTC) is the only stock in the index that’s up less than 10%. Start a two-week free trial to Bespoke Premium to sample our actionable research.  If you use this checkout link, you’ll receive a 10% discount on an annual membership if you stick with it past your trial period.

Earnings season kicked off this morning with a number of big banks’ third-quarter results such as JPMorgan (JPM) and Goldman Sachs (GS). Two other Dow components, both Health Care stocks, also had notable reports: Johnson and Johnson (JNJ) and UnitedHealth (UNH).  These two were the first triple plays of this earnings season. A triple play is when EPS and revenues are above analyst estimates while the company also raises forward guidance.

Despite some recent legal headwinds, Johnson and Johnson (JNJ) showed a strong quarter with EPS coming in 11 cents above estimates along with revenues that also topped estimates.  JNJ also raised guidance making it the first triple play for the stock in two years (the last being in October of 2017) and only the ninth since 2000 (as highlighted in the table from our Earnings Explorer snapshot below). In terms of the stock price reaction, normally JNJ has generally not been very volatile with an average full-day gain of just 17 bps in reaction to earnings across all quarters. In quarters when the company has reported a triple play, though, the stock has performed even better with an average full-day gain of 1.2%.  Today, JNJ is on pace to do even better having already gained 2.2%.

From a technical standpoint, the stock remains stuck in its recent range even after today’s rally.  At current levels, though, JNJ yields 2.85% which is more than the S&P 500’s 1.9% yield and the average for other Health Care stocks (1.68%).  Furthermore, of all 61 S&P 500 Health Care stocks, JNJ has the seventh-highest yield.  Johnson & Johnson is also a dividend aristocrat with a long history of paying and growing its dividend, something it has no done for 58 consecutive years.  Given the payout ratio is still relatively low at 44.9%, the company should be able to keep that streak going even if earnings growth stalled out.

UnitedHealth’s (UNH) price action has been a bit more exciting than JNJ as it has ripped higher in today’s session.  The stock is up over 7.5% after exceeding EPS estimates by 12 cents, topping revenues by over $500 million, and raising guidance.  This is the company’s fourth-best reaction to any quarter’s earnings since 2001 and is the 14th triple play in that time.  The only one of these past triple plays that saw a stronger stock price reaction to earnings was the first quarter of 2011 when UNH finished the day 8.07% higher.

While JNJ is still within its uptrend, this strong response for UNH has actually broken the past few months’ downtrend line.  UNH is now back to where it was in mid-August. From a dividend perspective, UNH is not as attractive as JNJ as it only yields 1.83%, slightly below that of the S&P 500.  The company also does not have as long of a track record (only 9 consecutive years) of increasing its dividend.  Granted, UNH does have a slightly lower valuation with a P/E of 14.6 compared to JNJ’s 14.8.  Both of these are also below the 19x average for all S&P 500 Health Care stocks. Start a two-week free trial to Bespoke Premium to sample our actionable research.  If you use this checkout link, you’ll receive a 10% discount on an annual membership if you stick with it past your trial period.