Strained supply is going to be key this earnings season.
I hinted about it last week after Nike Inc. (NYSE: NKE) announced delays from congestion at west coast ports.
Shortages are sending shockwaves through the economy, and they will hit earnings reports this quarter.
And now there’s a new development in these delays.
A massive ship got lodged in the Suez Canal. The Ever Given cargo ship went sideways and is now holding up roughly $400 million an hour in trade. The Suez Canal is in Egypt, so it’s not a direct impact on the U.S.
With the blockage potentially lasting for weeks, though, you can see how this dilemma could trickle throughout the globe just as we were hoping port congestion would die down.
The bottom line is that these issues are going to be around for a while. But it won’t be all bad news.
That’s because consumers are eager for more stuff. They showed up at the end of 2020, and with a fresh round of stimulus, they’ll have even more cash to spend. Demand is strong.
The issue is on the supply side.
But one positive out of these delays is it will move older inventory.
Take my family, for example. We just bought a new refrigerator and couch that, had we been able to pick from a wide selection, we wouldn’t have bought these exact items.
But, because our selection was limited to only items that were in stock, we didn’t have very many choices.
The point here is that companies can move inventory that otherwise may have gone unsold for months or years. And that rotation would have likely not happened without huge discounts that pad corporations’ bottom lines.
And when the new items hit the shelves, there’s still going to be strong demand boosting sales.
It creates headaches for sure, and some companies will suffer.
But, for the overall market, it could still be a bullish sign even with these headwinds.
Here’s what it could mean for two companies reporting earnings next week – Micron Technology Inc. (Nasdaq: MU) and CarMax Inc. (NYSE: KMX).
Earnings Edge Stock No. 1: Micron Technology Inc. (Nasdaq: MU)
Earnings Announcement Date: March 31, after the close.
Expectations: Earnings at $0.95 per share. Revenue at $6.2 billion.
Average Analyst Rating: Buy.
The semiconductor maker, Micron Technology, is struggling. Shares are breaking down, hitting lower lows after breaking a key support line the other week.
And it is set to hit headwinds from the congestion at ports and the latest delay in the Suez Canal.
But, and I say this from a big picture standpoint, it’s a stock you want to buy on the dip.
Micron helps advance technology around the world, a movement that is set to last for generations to come.
It doesn’t mean the stock will turn around this week with an earnings report, but it does mean that a plunge on earnings would move Micron to the top of my radar for a buying opportunity.
Here’s how things look on its price chart:
MU Is Going Down
The two main lines are the green support level and red resistance line. And what’s important to take away from those is the fact the green line is trending lower. This is what I mean by the company is struggling.
Shares are down 10% from that peak but are breaking down through the previous support levels in orange and yellow.
Earnings this week will set up the stock’s price trend over the next few weeks.
The options market is only looking for a 3.5% move this week. That’s nothing for a stock that saw price swings of more than 3% three days last week. I’d like to see some more weakness in the stock; then, it will create a great buying opportunity.
A strong earnings report, though, may not give us a chance to buy.
Earnings Edge Stock No. 2: CarMax Inc. (NYSE: KMX)
Earnings Announcement Date: April 1, before the open.
Expectations: Earnings at $1.28 per share. Revenue at $5.14 billion.
Average Analyst Rating: Outperform.
CarMax, the used car retailer, is benefitting from strong demand for used vehicles after COVID-19 hit. It’s still growing sales, but last quarter the pace of its rebound slowed.
More stimulus checks hitting consumer’s bank accounts this month are fueling the stock higher again, though.
You’ll see on the chart below that investors are still bidding up prices heading into this earnings report. And that’s great news.
KMX Heads Higher Before Earnings
There’s a strong green trend line guiding shares higher. And you’ll notice that shares erupted higher out of the previous consolidation period between the two yellow lines.
A breakout rally helped create that consolidation flag pattern, but it signals the stock is still heading higher as it rides that green support line.
Earnings this week could make or break the trend.
With consumers still showing strong demand for used cars and fresh stimulus checks hitting bank accounts, we know there’s a tailwind behind CarMax. It’s just a matter of how high it can carry it.
The options market is pricing in just a 3.5% move for CarMax this week too.
Shares dropped 7% on their last earnings report in December, where they highlighted a slower growth pace. Just a few days later, the stock bottomed out, and shares went on to climb 40% in the last three months.
Some investors look at prices rising as a reason to sell and take profits, but it’s a great sign to see. Higher prices lead to even higher prices.
I wouldn’t sell CarMax going into this earnings report.
We have our two stocks to watch for earnings this week, but the real opportunities pop up after the earnings announcement.
It works great because we are not gambling on the event. Instead, we take the wealth of new data that gets dumped on the markets and spot opportunities in a small group of stocks.
If you want to learn how I profit throughout the earnings season by jumping in after the earnings report, click here to watch a special presentation.
Chad Shoop is a Chartered Market Technician and options expert for Banyan Hill Publishing. He is the editor of three leading newsletters: Quick Hit Profits, Automatic Profits Alert and Pure Income. His content is frequently published on Investopedia and Seeking Alpha. Check out his YouTube Channel to see his latest market insights.
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