This morning I wrote about how I was “Nibbling On NKE” heading into its earnings report this afternoon. It was similar to the plunge into United Natural Foods (UNFI) I made on Monday ahead of its earnings report Tuesday morning. Why did NKE work while UNFI didn’t?
The first thing to understand is that these kinds of market timing trades are not – and can never be – guarantees. They are somewhat hit and miss. What you try to do is get the risk/reward and probabilities in your favor. If you do, the things you can’t control will even out over time, your edge will shine through, and you’ll come out ahead. But not every single time.
Now let’s examine the specific trades in NKE and UNFI. It was clear to me from NKE’s stock chart and the chatter/sentiment I was hearing about the name that almost everybody was universally bearish heading into its earnings report. That meant that anything better than terrible might prove to be good enough. And we got a decent report. Currency neutral revenue was +2% and margins held up nicely resulting in strong profitability. Shares closed the after hours +7.85% and I wouldn’t be surprised if they jump more than 10% Friday. The key was: the report was good enough. I couldn’t know in advance that it would be but I reasoned: “This is NKE. It’s a great company. There not going anywhere. Most likely the numbers will be okay.” And they were.
The reasoning was similar heading into UNFI’s earnings report. The difference was that – despite the overwhelmingly bearish sentiment heading into the report – the report itself was terrible, far worse than expected. That’s why shares dropped 27.43% on Tuesday. Had the report been somewhat better, we could easily have gotten a nice pop. The point is: I didn’t know what the reports were going to look like, but the risk/reward was such that I was willing to plunge.
Think of it like a poker hand. When you get KK All In preflop vs AQ, you are 70% to win. But that means that 3 out of 10 times the Ace is going to come and you are going to lose. Nevertheless, you want to take this spot every time. Just because the Ace comes doesn’t mean you made a bad play. Keep pressing your edge and let the math take care of itself over the long term. The same thing applies to trading. Both are arts not sciences.