Chris Johnson

Outsmart the 'Dumb Money' With Profitable Earnings Trades

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If it wasn't for the plunging stock market intertwined with government bailout plans and Fed rate interest cuts, the biggest story right now would be earnings season.

But, as it stands, we don't recall an earnings season that's been met with such indifference, or one where expectations were any lower. Still, healthcare stocks are seen as safe havens during recessionary periods, and it's true the sector has been one of the stronger groups during the recent correction for a couple of reasons.

To begin with, the sector's fundamental characteristics have been supported by earnings stability from such companies like Johnson & Johnson (JNJ) and Kimberly-Clark (KMB).

What's more, healthcare and consumer staples names are deemed more defensive in recessionary conditions and, thus, are considered safer ways to play.

Playing JNJ the Earnings Way

A recent pullback in JNJ was met by a rush of pessimism, which suggested the stock was oversold. Around Oct. 9, this selling opened a window of opportunity around to catch the stock at a discount just ahead of its earnings report. We upped our discount by buying call options for a fraction of the stock price.

Overall, our trading strategy at The Winning Edge involves finding the best bullish plays. We look for outperforming stocks that have been beaten down by pessimism -- or at least were targets of the skeptics. That's exactly what we saw with Johnson & Johnson.

JNJ hit our radar for several reasons -- one of the biggest was that, at the time, it was set to report earnings. JNJ hasn't fallen short of an earnings estimate in nearly three years, and it didn't disappoint in this latest round.

The Street's View is Sometimes Askew

Analysts were calling for just a nickel increase compared to last year, but JNJ hadn't had that insignificant of a year-over-year gain since an earnings miss in January 2006. To us, this indicated JNJ wouldn't have any trouble besting expectations again (it ultimately showed a 6-cent increase, which beat estimates by a penny. And, in this market, sometimes that's all it takes).