Earnings Season Preview + NFLX and DECK trade ideas

Earning season is upon us. I am here with my brother and co founder of Like Folio Land and Swan. And we're gonna talk about earning season. because there's a lot of opportunities that traders miss because they don't know. what to do, they don't know how to do it, and they get scared of the volatility during earnings. But Lannon's gonna take us through the themes he's watching as we go into this earnings season, the big themes.

Two trades, two predictions for next week, week one of earnings season in the Lightfolio world. And also quick tip on how to trade these with limited risk, how to look at past history of these moves and make smarter trading decisions around earnings. So Lennon, let's jump right into it. Thanks for Joining me, I think this is really great to get this out there right before the earnings season starts. First of all, let's get into your big themes.

Yeah, so first of all it's for us it's week one, like you said, and I don't know why we decided this, but years ago we decided that Netflix reporting is week one for us and I think it makes a lot of sense that The first big company that a lot of people care about. It's a 10-week season and we're kicking it off with Netflix. One of the big themes that we're looking at is the EPS guidance. Historically, of the companies who give forward guidance.

But you can see the 10-year average is like 38% are positive. The five-year average is 42, 43% positive. Right now it's a 50% positive rate of those companies that give Ford guidance. So there's a lot of higher expectations going into this. And I think that could be a factor. If you've got high expectations, you gotta meet'em or else the stock may sell off. So I think investors are gonna be looking for more out of these companies.

Yeah, you start to get used to positive guidance and it can be a tough drug to quit. That's right. That's right. Another one very similar is the PE ratio. People are willing to pay more now than they have been. If you look at the ten year and five year averages of P E ratios in the S P five hundred, you know, they're lower than they are now. I think now we're getting into the twenty three, twenty three and a half range, whereas

The 10-year average is about 18. People are paying a premium for companies because of the higher expectations that revenue is going to continue to grow, earnings are going to continue to grow at these fast paces, a lot of it driven by efficient. Yeah, and a lot of it driven by the top five or six stocks in the S P five hundred. I mean you're willing to pay Unbelievable PE ratios.

if the E is growing at a rapid rate, like NVIDIA or these types of companies. So that tends to stretch things a little bit, but it's good to understand the way the market's looking at this. We kind of expect At least half the companies to raise their guidance were already paying fairly expensive ratios to own these stocks.

Let's break it down, Lena. I know one of your other big themes is this kind of K shaped economy that we have where The haves are doing very well and the have nots are doing poorly. And the companies that cater to each of those groups are having very much a different Yeah, result. When you think about the letter K, the two prongs that stick off, one's going up, one's going down. So they're starting in the middle and they're going different directions. That's what we're talking about. And it's

I I think this chart really dials it in. On the left right X axis is how well off the consumer of these companies are. The further to the right, the richer the customer, the further to the left, the poorer the customer. And then the vertical axis is how well, generally speaking, the market and like folio expects these companies to do in this round of earnings. And it, I mean, that's that's a pretty solid line up and to the right. So the better off your customers are.

as a company, the better off you're likely to do. And so it's it's not just the haves and haves nots of consumers, it's a has and haves nots of industries and sectors and businesses. And some it's really interesting. Some of them even break into the same company. If you look at Delta just reported, their first class or their business class was up nine percent year over year, while their main cabin class was down four percent year over year. It is in the same company.

So you're gonna see that there's not a lot of companies that have that where they cater to both customers, but it's pretty interesting that it's already coming to fruition this early. Yeah, it is. For those of you listening on Spotify or Apple or just can't Completely read the font on this chart. What you're seeing is at the bottom left where the consumer is doing less well and the earnings expectation is very low is dollar stores, fast food, budget airlines, et cetera.

At the top right, where the company's customer is doing very well and the company's earnings expectations are very high, fine dining, luxury retail, luxury travel, soft luxury brands. Really highlight. that K shaped economy that is happening right now and only accelerate.

That's right. Another theme that we've seen is CapEx spending, especially in technology AI. And you see that Meta, Google, Amazon, Microsoft have all been ramping up their spending and It's significantly. We're also expecting that to go outside of tech. We're expecting that to go into other areas, particularly healthcare. I think that As obviously when it comes to technology and AI, the first companies that are going to start spending on that are the tech companies.

But as it continues to prove itself as a technology, it's going to filter down into the less tech companies and that's going to continue to go more and more. So I think we're going to see that infiltrating earnings reports. It's going to be interesting to see how companies take that because obviously that

You know, that hurts your cash flow, but it's a promise of future efficiency. That balance is going to be very interesting to watch. Now you start to get a lot of pin action from this as well. A lot of pin action on CapEx spending, especially around AI and compute. All right. So those are the big themes. Going into this earnings season, these tend to develop as we go. After week one or week two, you start to see trends.

of how the market is reacting to earnings that can very much shape the way we trade things in weeks three, four, five, six, et cetera. But

Let's look at week one, Landon. What do you got for us? I know you got two directional predictions that we're ready to make for this first week of earnings season. That's right. So first was Decker Outdoors. This is sort of the company that started it all for like Folio. Decker's is a huge factor. Now in this one we are looking pretty positive. They've got two main brands, the Ug Boots and the Hoka shoes.

And both of them are very strong year over year. Uggs up twenty four percent. Hoka's up thirty-two percent. And when you look at that, you think, all right, the company must be doing pretty well. Surely the stock's trading up. But when you look at the stock chart, no, it's not at all. It is at the floor right now, basically. Just trading under a hundred dollars. And I think there's a big divergence between what we're seeing

in the consumer sentiment, web data, et cetera, versus what Wall Street expects. And that's usually where like folio does the best. When we see one thing and Wall Street or investors see another, that's where we make our money. When we agree, it's like, all right, we won't trade this. But when we disagree, that's when we can make a Yeah. So Decker's Outdoor Ticker Symbol D E C K. That's one we have a directionally positive bias on going into earnings for that week. Now let's talk about Netflix.

quarter, of course, just all as always, week one. Netflix kicked off earnings season for us or it was in the first week and Tends to get a lot of attention from Wall Street. What we say about that sometimes resonates quite a bit. Take us through what happened. last quarter on Netflix, how we kicked off the earnings season and see if we can do it again. Sure. So this is a chart of what Netflix looked like right before they reported.

just to give people some perspective. They were up for a long time, a little bit of a pullback. Or you could make an argument technically either way. But of course we don't go off technicals, we go off data. And the data you can see on web visits was down significantly. I mean this was a report in the middle of July and you know you can see there the data was for web visits was significantly lower. And obviously people go to Netflix.com to sign up to expand to watch.

So less visits is obviously bad for the company. So we had a a pretty negative slant on it, as you can see. This is a snippet. of our earnings sheet that we send out. Every company has one of these scores. Netflix was a negative fifty two. That range is from negative one hundred being super bearish all the way to positive one hundred being super bullish. Negative fifty two is firmly in the bearish camp. You can see that we recommended what we call a coin flip bearish trade.

It's an options trade that limits your risk. You can risk You know, like two hundred and fifty dollars to make two hundred and fifty dollars. Really cool way of trading, but you can see all the notes that we had in there. So this is the week of Trading. But the very far left is Monday.

before they reported on Thursday afternoon. And on the very far right is Friday. You can see Monday morning it ramped up a little bit. And then really all week it kind of sold off on the report. It went a little crazy, but then settled back down and ended up selling off for the week. Now this visual gives you an idea of how we trade this. We didn't short Netflix.

If you wanted to short a hundred shares in Netflix, you'd need sixty three thousand dollars or something. That's not what we're here for. We actually initiated a trade that risked a maximum of two hundred and forty dollars. You can see there at the far left where we entered on Monday morning, and that red line represents where we have our maximum loss. So if it's above that, we lose$240. No matter how high it goes. It could double, we'll lose$200.

But the green line represents where we max out our gain at$260. And anything below that was a maximum gain. Now this was a very comfortable trade in that we entered it and from the get go it just started drifting lower and lower into earnings. It was in positive territory the entire time. We had a maybe

two minute scare right after earnings were reported where they w went crazy and then it settled back down and and ended up closing comfortably into our max profit range. So you know you risk two forty to make two sixty. Uh anytime you can do that, obviously it's gonna be a good thing. We did very well with this trade. Yeah, so before we get into the trade style, I let's go through Netflix for this upcoming week. You got a similar

Yeah, we saw a little blip in July on web visits, but it's faded back off again. And so we've got continued low data on Netflix. We don't think they're doing really well. We did notice a significant shift in consumer sentiment, at least for a brief period during this cancel Netflix phase.

I think it was Elon Musk that kicked it off and it was really jumping around the internet. A lot of people did it. It looks like that's mostly faded away. We're not sure exactly how important it's gonna be. It's definitely gonna be a negative. Not sure how negative that chart. Showed you that it's a good idea.

popped up for maybe two weeks and then faded off. I don't think it's gonna be a huge subscriber mass exodus or anything like that. Slightly negative. Probably would have had a much stronger score if this chart would have stayed stronger, but it did fall back, kind of revert to the mean. So we're bearish on Netflix again this quarter and bullish on

Decker's outdoor going into earnings. Landon, take us through the thinking of how you think about creating a trade and so on. Because I think one of the most important things for people to understand. When we're trading earnings, we are not at all claiming A 90% or 100% win rate. We don't even seek that. What we're looking for be shooting way lower than 90. If you hit 90, that means you're risking way too much. Right. What we're looking for is an edge. I wanna be the house dealing blackjack.

Yeah. You know, uh you're the house dealing black check and you win fifty three percent of the hands or fifty five percent of the hands. And sometimes win more than you would have risked, that's a good formula for ending up Built being able to build a marble palace to surround that dealer. That's the way we think about earnings. This is a way to get a lot of trades on the book. Where we have a 55-60% chance of being directionally correct, and a lot of times are seeking profit that is.

uh greater than the max risk on the trade, just like you showed with Netflix. So with that kind of background in mind, so people don't think, well, wow, Netflix and Deckers are locks this next week. Right. We've got a fifty five, sixty percent chance on both. So how do you then

formulate the trade. How do you think about creating that trade, Lannon? Sure. There's two things to think about. First, you have to think about how much you're risking and how much you're making. Like we showed on that Netflix trade. We risk two forty to make two sixty. Now if you hit that trade, Fifty percent of the time, you're gonna make a lot of money.

Right. Because you're making 260 and you're losing 240. I'll flip that coin all day long. And so if you can structure the trade in that way, you're off to a great start. The second thing that you have to look at is what is the expectation of the move? that this stock is going to do.

And what has it done in the past? And what is our expectation of it? So you can actually see one of the things we put out, this is very valuable information, is the past four moves data that kind of the middle chart there or the middle column on this chart. It shows you how much this stock has moved on a Monday to Friday basis in the last four earnings reports.

Just to the left of that, it shows you the expected move. That's the market expected move. It's calculated using options, not what like folio thinks, it's what the market thinks. If you see a big discrepancy there, there's an opportunity. For example, with Netflix. There was a 7.6% expected move. The past history was four and twelve and seven and three. And so they kind of, you know, it's right in the range, right? It's not like a big discrepancy.

But sometimes there is. Sometimes you'll see pass moves in the three to four range and an expected move of six or seven or eight. And that should send off big flags saying, hey, we've got an opportunity here. The market is expecting way too much.

Uh so you can actually sell some premium. We can structure trades to hit really high win percentages. On the flip side, sometimes it's the other way where it has a history of moving ten or twelve percent, but the market's only expecting six or seven this time, you say, you know what? We got a chance at a home run here. It's really cheap premium. Let's buy some. What's cool about this is

we do that work for you, then it's just a matter of executing and it's really simple to execute. All the trades are very similar. It's just a matter of where you put your strikes. And we explain all that.

Awesome. All right. So recap. K-shaped economy is definitely haping happening. Expectations are pretty high. Guidance is generally positive. There's probably more room for opportunity on downside trades than upside trades going into this quarter just because of those expectations. The high PE ratio combined with the Hi Pains.

that if I had to guess of all the companies reporting, is it gonna be negative or positive, I'd probably go negative slightly on the reaction. It's also gonna come down to company by company, right? These are themes that we're looking for across all of the companies that we cover, five hundred companies. When we look at each one, we're gonna know what the expectations are and what the data looks like. And they may have high expectations, but if the data is really high, then we'll be bullish.

But if they have high expectations and the data's really bad, we're gonna lick our jobs and hit that one for a bearish. So we'll just have to see on a company by company basis. But I agree. Overall, yeah, very exciting. I love earnings season. It's my favorite times of the year. Yeah. Basically ten weeks, four times a year. So forty weeks of the year is earnings season for us. I love kicking it off. We'll learn a lot from this first week.

But it's great to have some information going into it. So if You know, if you want to learn more about this and stay involved with us, we've got a free newsletter at likefolio.com. You can go to likefolio.com or scan the QR code at the top left of this video right now to get involved with that. We love

having people on the free list. And I love being able to get out in front of an audience like this with you, Lane. And thanks for bringing all this info. I think it's awesome. And good luck on the earnings season ahead. All right, guys, thank you very much for joining us and we'll see you soon.