Buy the Overreaction to Poor Earnings

This earnings season came at a time of market weakness. That set the tone for how most stocks have fared. Companies that have beaten earnings haven’t had much of a move higher on the news. However, those that missed on earnings have been heavily punished.

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  • Fortunately, the earnings move could mean investors have a longer-term opportunity. That’s because a company that’s been hard hit from earnings may start to trend higher in the weeks ahead.

    Despite good earnings relative to the impact of the writer’s strike, Warner Brothers Discovery (WBD) took at a hit as the media giant noted that ad revenue was declining.

    Shares lost over 17 percent on the news. However, that may be an overreaction to a slowdown in ad spending.

    WBD has been out of favor with the rest of the media sector, and shares now trade at about a 40 percent discount to the company’s book value.

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  • In other words, its media assets and international properties look substantially undervalued at current prices.

    Action to take: Investors should consider shares as a contrarian opportunity here, with a low-double-digit rebound in the weeks ahead. At present, WBD does not pay a dividend.

    For traders, the January 2024 $10 calls, last going for about $0.65, could see high double-digit returns in the coming weeks should shares start to trend higher following the massive earnings-related drop.

     

    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 of the companies mentioned in this article.

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