Trade Alert: Full earnings report analysis for Twitter and Invensense PLUS A tiny speculative options trade

Feels like the markets coiling before its next phase of volatility. Do you remember just a few trading days ago that the DJIA dipped back below 16,000? Are you prepared for wherever the near-term market might take us, including a potential near-term weakness towards the 16,000 level again.

I’d likely do another round of buying if we got back near those levels again. Tough to game, so let’s be patient and look at some pitches around earnings reports.

Last week I gave you my pre-earnings report analysis for Microsoft and Facebook. Today, I’ll take an in-depth look at Twitter’s and Invensense’s earnings report set-up.

To remind you from last week’s earnings column:

When you try to game an earnings report, you’ve got to get three things right:

1. What the fundamentals of the last 90 days have shaped up to and whether the reported result is going to be better or worse than expected.

2. Know what the sentiment around the stock and the expectation for that earnings report is. If everybody’s expecting blowout numbers that can set a bar that’s too high to catalyze an earnings report pop. Vice versa if everybody’s expecting disaster and a collapse. It’s a version of the buy-the-rumor, sell-the-news dynamic that’s often inherent in trading.

3. Figure out the best way to trade the reaction to earnings that you expect after the company reports. Sometimes you can buy some near-term call or put options to benefit from a huge post-earnings move. Sometimes the premium on those options are too high to mess with, so you’re better off trying to buy/short the common stock itself.

So let’s apply this framework to Twitter’s upcoming earnings report tonight.

1. Twitter’s attempt to seriously monetize their huge daily user base is still in its infancy. In its first quarter or so as a public company, Twitter failed to meet the expectations that Facebook’s rapid acceleration of revenue growth had created. That changed last quarter when the company finally showed that it had figured out how to show some real growth in average revenue per user. That’s probably the key metric in tonight’s report too, and I think that Twitter’s continued to ride that recent traction to monetize its user base. So I expect Twitter’s report to be better than the consensus sell side analyst estimates of 1 cent per share earnings and $351 million in revenue.

2. Expectations are not high, but they’re not terribly low either. That huge upside they reported and the subsequent pop in TWTR’s stock last quarter keeps sentiment from going too low, but the bears and shorts are still around and grumbling. Feet to fire, I’d guess TWTR is set up for a 5-10% pop if they deliver the upside I expect.

3. The premiums on near-the-money call options aren’t as high as I might expect for a stock that’s this volatile, and if we get the full 10% move, we’d probably make 30-100% on the call options. A 5% move tomorrow and we’ll probably make 10-30% on the call options. Buying common stock opens us up to a bigger loss if our bullish analysis is wrong and the stock take a huge hit tomorrow. I’m increasingly a long-term Twitter, so I’d probably stick with common stock for my trade for now and if the stock were to get smacked tomorrow, I might even look to add it to the Revolution Investing model portfolio.

I continue to think Facebook is a better-run company that has more potential ways of monetizing their larger user base, but Twitter’s got a critical mass of their own. Have you ever realized just how many times you see a FB or a Twitter symbol every day? You see their symbols or their names and websites addresses and app references on food packaging, even for pets, and on most TV commercials. Twitter’s got the added marketing boost in the subliminal Twitter connection that every hashtag you ever see has inherent in it.

Twitter’s been a wildly volatile stock since its IPO. My own analysis on Twitter has been somewhat volatile too, as I’ve swung from post-IPO TWTR bear to a post-crash TWTR bull.  I recently added a little bit of Twitter to my own portfolio, and I might have made it a bigger piece, but I’ve already got huge gains and a big position in similar stock, Facebook.

Let’s do Invensense while we’re at it.

1. We know that other than Apple and some Chinese Android handset makers, that the smartphone business is struggling. Likewise, the home gaming console industry isn’t blowing the doors off anywhere right now.  Synaptics SYNA, which is somewhat similar to INVN, recently reported a terrible quarter and guided lower. Invensense is in the iPhone 6 though, and its the first time that will impact the company’s quarterly reports and we know how strong demand for iPhone 6 has been. Tough to call, but feet to fire, I’d guess a better-than-expected quarter is more likely.

2. Expectations are very low into the report. The stock has been acting terribly for weeks on end, pretty much ever since it was confirmed that Invensense won the iPhone 6 supplier deal. The action has been bad enough to make even the biggest fundamental analysis bull question his conclusions. That likely means a huge pop for the stock if they do beat. If the report is terrible or the company has lost some other huge supply deal or something else is wrong that we don’t know about — well, there’s a long way down if the stock is actually signaling something like that. Be aware of the risks of investing in a high-growth small high-tech company like this that is trying to manage its growth and meet new demand. That can be very difficult to do.

3. Near-the-money call options, say with strike prices from $18 to $21 are expensive, but not terribly so for a stock this volatile and one that might have such a potential near-term pop catalyst as our above bullish analysis indicates. I’ve added some call options the last time INVN was around these levels and I’m going to do one more tiny tranche of INVN call options dated out into November. Again, this is a gamble/speculation with a very small fraction of my capital — this isn’t something that long-term investors should even care about. I also have my mid-weighted Invensense common stock position that I plan to just hold steady into the report as we learn exactly what’s going on with this company.

Lastly, before you even dream of doing an earnings-report short-term gamble, remember that trying to game earnings reports is one of the hardest and most volatile ways of trading. Long-term investors are best served by ignoring the often wild moves that a stock they own will make after an earnings report. On the other hand entirely, if you’re a long-term investor, using a huge post-earnings selloff to scale into a stock you want to own for the long term is one of the best strategies for your playbook.