Goldman Sachs Top 5 Expected Earnings Surprise Winners

July 10, 2014 by Jon C. Ogg

In a report out this week, the Goldman Sachs options research team listed its top 25 tactical trades for earning season. While the report includes many names, the trick is to identify the best of the best calls, rather than just taking a blanket approach covering each and every call.

The firm’s analyst, John Marshall, said that option-implied earnings moves are currently at their lowest level in eight years. His take is that this makes option buying an exceptionally efficient strategy for investors to position themselves for earnings surprises in the coming weeks of this second-quarter earnings season, which is just getting underway.

Again, covering 25 names is simply too broad of a sword for us to cover for our readers. That being said, there were five picks in the report that were shown to be the most attractive with upside expected in their earnings reports.

Cisco Systems Inc. (NASDAQ: CSCO) was the top tech pick expected to have an earnings beat. We would warn readers that the options action here would have to be much longer-dated because Cisco’s earnings are more than a month out due to its off-calendar fiscal reporting. Cisco did recently beat earnings and get its momentum back, and Goldman Sachs expects that to continue. We recently highlighted how analysts decided to chase Cisco’s price targets higher after the most recent earnings report in May, and Goldman Sachs lifted its target to $28 at that time.

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Capital One Financial Corp. (NYSE: COF) was the top financial sector pick expected to beat earnings. Shares are currently around $84, but that is less than $1 from its high. The consensus estimates are $1.79 in earnings per share (EPS), and note that this is actually lower than the $1.87 per share posted a year ago. As a reminder, Goldman Sachs added this stock to the Conviction Buy List with a $90 price target back in January. The consensus price target is around $85.50, and the highest price target is $95.00.

Netflix Inc. (NASDAQ: NFLX) was the Goldman Sachs top media pick for an earnings beat this earnings season. The consensus EPS estimate is $1.14, up massively from the $0.49 reported a year ago. Goldman Sachs was very bullish recently, raising its rating on July 1 to Buy from Neutral. The real standout here was the firm’s $590 price target, which catapulted the new street-high analyst price target up by a massive $65 from the prior high.

Pioneer Natural Resources Co. (NYSE: PXD) is one of the high-priced stocks trading north of $220, and Goldman Sachs is expecting it to be the top earnings beat among the independent oil and gas operators. We would point out that this was not the first time that Goldman Sachs has mentioned Pioneer as an expected earnings beat based on options strategies — even back when the strike under question was closer to $200.

Endo International PLC (NASDAQ: ENDP) seems like an unusual call because it is biotech. The stock was started as Buy at Goldman Sachs last September, and let’s just be nice and say that the stock has surged well above the initial $52 price target offered up back then. The consensus estimate signals that earnings will fall to $0.88 per share from $1.42 a year ago. There is also on an expected 16% revenue drop to $643.7 million. Needless to say, Goldman Sachs is not expecting the drop to be as bad as the consensus targets.

These calls are not meant to be breaking news, but they are interesting views for positioning ahead of earnings reports. That is particularly the case if the market sell-off brings more “bargain buying” opportunities on pullbacks. Consensus estimates and targets are from Thomson Reuters.

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