Last week, we focused on earnings breakouts.
Two stocks, Micron Technology Inc. (Nasdaq: MU) and Acuity Brands Inc. (NYSE: AYI), showed signs of an imminent breakout on their price charts.
Today, I have two more stocks I want you to keep an eye on this week.
Not just for the pop or drop on earnings, but for the clear patterns they have developed.
Just look at Micron from last week.
The stock was trending higher heading into the earnings announcement. Then the company beat analyst expectations, but the stock dropped 5% that day. Now shares look set to be stuck trending sideways for weeks.
Acuity Brands tried to rally on earnings. Numbers topped analyst estimates by more than 20%. But traders quickly sent the stock lower to help it close down more than 5% on the day.
Acuity did break out, but it was to the downside. Shares broke below the key resistance I pointed out last week and are set to head lower from here.
This shows the key moments that an earnings announcement can produce. The 5% swings on the day are enough to make or break key trends for the stocks. Trends that you can capitalize on as they continue to play out.
I’ve taken this concept to the extreme with my Ultimate Trading Strategy. If you want to learn more about it, and how you can pocket as much as a dozen triple-digit gains a year using options, click here.
This week, I want to turn to two more companies to watch for breakouts — PriceSmart Inc. (Nasdaq: PSMT) and AZZ Inc. (NYSE: AZZ).
Both of these companies have experienced a clear consolidation on their price charts, paving the way for a massive breakout.
Earnings this week are going to be a key catalyst to watch.
Let’s see what we can expect…
Earnings Edge Stock No. 1: PriceSmart Inc. (Nasdaq: PSMT)
Earnings Announcement Date: Thursday, after the close.
Expectations: Earnings at $0.64 per share. Revenue at $848 million.
Average Analyst Rating: Hold.
PriceSmart operates membership shopping warehouses throughout Central America, the Caribbean and Columbia. Think of it as the Costco or SamsClub of Central America.
Our stocks from last week show it doesn’t really matter whether or not a company beats or misses expectations. It doesn’t tell us the direction of the stock.
That’s why I’ve come to rely heavily on price charts and what they can tell us. They’re your best indicator of sentiment.
Right now, we are seeing PriceSmart trade in a wedge formation, where the resistance level (in red) and support level (in green) are closing in on each other.
PSMT’s Post-Wedge Position Is Uncertain
Source: Optuma.
A wedge is a period of uncertainty for a stock. This one is rather wide, but we see the surge from November to March, where the stock jumps 50%.
But then investors were taking profits, and buyers were not eager to rush back in. That’s why we have seen the stock sell-off by more than 10% in recent months.
The good news is that buyers are showing up now, and that’s what has created this wedge pattern with a rising support level.
We just need to see the breakout to know which direction PSMT is headed in for the next few months, and earnings could easily set that trend in motion.
Traders are betting on a 2.7% move this week from earnings.
Considering where we are in the wedge pattern, we could easily see PSMT move 5% to 10% this week to get us to a breaking point. You could play the options market for a bigger than expected move given the lower percentage move it is currently pricing in.
Earnings Edge Stock No. 2: AZZ Inc. (NYSE: AZZ)
Earnings Announcement Date: Friday, before the open.
Expectations: Earnings at $0.62 per share. Revenue at $223 million.
Average Analyst Rating: Outperform.
AZZ is a small-cap stock by market capitalization, just $1 billion, but trades above $50 a share. It’s in the industrials industry, providing metal, welding, specialty electrical equipment and more globally.
We can probably agree this is stock you would use to play the pending deal for a U.S. infrastructure bill.
With billions set to float around in various industrial companies, a small-cap stock that does just $200 million in revenue a quarter could see a boost to its bottom line.
When we look at the price chart, shares are trading in a wedge pattern similar to PriceSmart. The closer those two key levels get, the more imminent a breakout comes.
AZZ’s Wedge Is Stuck for Now
Source: Optuma.
Again, we see AZZ surge higher from November to March, a 70% rally.
Then investors took profits, and the stock dipped. Very basic stuff here.
But what happens in a wedge is that buyers and sellers are battling it out for months. The sellers want to push AZZ down back into the $30s while the buyers are ready to resume an uptrend that will have the stock near $100 a share by the end of the year.
At some point, one side will break.
That’s when we get the breakout that we want to trade.
Options traders are only pricing in a 2% move on earnings. AZZ could pop or drop by more than that, but here’s the thing. A 2% move keeps it within the wedge, and it could be weeks before we get a true breakout.
That’s always a risk, and it’s the number one reason why easy money can be made after the breakout occurs.
Whether it comes on earnings, or another market event, we need to see the breakout to know how to trade this stock.