Sellers Hit Adobe Stock Ahead Of Fiscal Q1 Results; FedEx Also Set To Report Amid Bullish Price Action

Adobe (ADBE) and FedEx (FDX) are next up on the earnings calendar, along with top-rated growth stocks like Five Below (FIVE), Lennar (LEN) and Array Technologies (ARRY). Adobe stock has rallied back after gapping down Feb. 24, but it’s still in a downtrend with potential resistance near 352-353.

FedEx stock looks a lot better than Adobe stock after jumping above its 200-day line on Feb. 1. It’s been showing relative strength since then while holding support at its 21-day exponential moving average.

FedEx gapped up more than 3% on Dec. 21 after the company’s last earnings report. Earnings and revenue declined from the year-ago period. But investors sent FedEx stock higher after the company said it planned to cut an additional $1 billion in costs after announcing cost-cutting measures in September, along with an increase in package-delivery rates.

For the current quarter, the Zacks consensus estimate is for adjusted profit of $2.62 a share, down 42% from a year ago. Revenue is expected to dip 4.5% to $22.6 billion. Results are due Thursday after the close.

Adobe Stock Struggles After Acquisition News

Adobe has been in acquisition mode to fuel growth. In September, Adobe announced plans to acquire a major competitor by offering $20 billion in cash and stock to buy cloud-based design platform Figma.

But some analysts thought Adobe overpaid for Figma. That sent shares lower by nearly 17% on Sept. 15. Before Figma, Adobe’s largest acquisition was a $4.75 billion transaction to buy Marketo in 2018.

In November, the Department of Justice requested more information from Adobe regarding the Figma buy. Adobe stock gapped down on Feb. 24 on news that the DOJ is reportedly planning to file an antitrust lawsuit to block the acquisition.

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Shares gapped up Dec. 16 after the company reported a 13% rise in quarterly profit. Revenue increased 10% to $4.52 billion. Adobe’s Digital Media segment, which includes Creative Cloud design software subscriptions, delivered revenue of $3.3 billion, up 8%.

Adobe’s earnings report is due Wednesday after the close. Adjusted profit is seen rising 9% to $3.66 a share, with revenue up 8% to $4.6 billion.

Three Other Reports To Watch

Homebuilders continue to be nice pocket of strength in the stock market. Lennar (LEN) has a relative strength line poking into new-high ground as the stock consolidates near the 10-week moving average.

A Composite Rating of 98 is helped by a consistent track record of bottom- and top-line growth in recent quarters, although earnings and revenue are expected to decline in the current quarter. Results are due Tuesday after the close.

Meanwhile, amid a lot of volatility in the solar group, Array Technologies (ARRY) is also on the earnings docket. Earnings will be out Wednesday after the close.

Array has delivered two straight quarters of accelerating revenue growth, but that’s expected to slow in the current quarter, up 65% to $366.3 million.

Array is trying to hold support at its 10-week line in an eight-week consolidation.

In the retail sector, watch for reports from Five Below and Academy Sports & Outdoor (ASO).

Five Below has been trending higher while holding support at its 50-day line. FIVE stock gapped up bullishly Dec. 1 after the company reported revenue of $645 million, up 6% year over year, and well above the $612 million consensus. Results will be out late Wednesday.

Academy Sports has also been trending higher ahead of its earnings report due Thursday before the open. Group peer Dick’s Sporting Goods (DKS) gapped up Tuesday after reporting strong quarterly results.

Options Trading Strategy

A basic options trading strategy around earnings — using call options — allows you to buy a stock at a predetermined price without taking a lot of risk. Here’s how the options trading strategy works and what a call option trade recently looked like for Adobe stock.

First, identify top-rated stocks with a bullish chart. Some might be setting up in sound early-stage bases. Others might have already broken out and are getting support at their 10-week lines for the first time. And a few might be trading tightly near highs and refusing to give up much ground. Avoid extended stocks that are too far past proper entry points.

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In options trading, a call option is a bullish bet on a stock. Put options are bearish bets. One call option contract gives the holder the right to buy 100 shares of a stock at a specified price, known as the strike price.

Put options are for weak performers with bearish charts. The only difference is that an out-of-the-money strike price is just below the underlying stock price. A put option gives the holder the right to sell 100 shares of a stock at a specified price.

You earn profits when the stock falls below the strike price with a put option.

Check Strike Prices

Once you’ve identified an earnings setup for a call option, check strike prices with your online trading platform, or at cboe.com. Make sure the option is liquid, with a relatively tight spread between the bid and ask.

Look for a strike price just above the underlying stock price (out of the money) and check the premium. Ideally, the premium should not exceed 4% of the underlying stock price at the time. In some cases, an in-the-money strike price is OK as long as the premium isn’t too expensive.

Choose an expiration date that fits your risk objective but keep in mind that time is money in the options market. Near-term expiration dates will have cheaper premiums than those further out. Buying time in the options market comes at a higher cost.

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This options trading strategy lets you capitalize on a bullish earnings report without taking too much risk. Risk is equal to the cost of the option. If the stock gaps down on earnings, the most you can lose is the amount paid for the contract.

Adobe Stock Option Trade

Here’s how a recent call option trade looked like for Adobe.

When Adobe stock traded around 339.75, a slightly out-of-the-money weekly call option with a 340 strike price (March 31 expiration) came with a premium of around $15.15 per contract, or 4.5% of the underlying stock price at the time.

One contract gave the holder the right to buy 100 shares of Adobe stock at $340 per share. The most that could be lost was $1,515 — the amount paid for the 100-share contract. This is not a trade for a small portfolio because buying 100 shares of ADBE at 340 would cost $34,000.

When taking the premium paid into account, Adobe stock would have to rally past 355.15 for the trade to start making money (340 strike price plus $15.15 premium per contract).

For those who believe more downside could lie ahead for Adobe, a put option with a 340 strike price (also March 31 expiration) offered a slightly lower premium of around $14.12.

Follow Ken Shreve on Twitter @IBD_KShreve for more stock market analysis and insight.

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