For investors, a company’s prospects come down to earnings. Rising earnings will drive a stock higher over time. And when a company reports great earnings, but shares sell off, it may create a buying opportunity in the short-term.
That’s especially true when a company isn’t just reporting great earnings but manages to consistently beat bullish expectations. Such a company can likely lead to far higher returns for investors when bought during a selloff.
Right now, app performance monitoring company Datadog (DDOG) fits the bill.
Earnings surged and far exceeded expectations in each of the last four quarters. However, shares sold off as the company President announced his retirement.
Over time, management changes are inevitable in any business. The market selloff reflects disappointment in the move. But as long as earnings can trend higher, that disappointment will be short-lived.
With the recent selloff, shares are now down 17% from their 52-week highs, and look like a reasonable buying point given their growing earnings.
Action to take: Investors should build a partial position here, and use any further market weakness to add to that position in time.
For traders, a rebound from the earnings-related selloff looks likely in the months ahead. The July $125 calls, last trading for about $3.75, could see mid-to-high double-digit returns from a rebound in the coming weeks.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any company mentioned in this article.