How Not To Get Beaten By BUD

Bud Light's Brand Revival Backfires...

As we mentioned in our last post, Bud Light's latest attempt to revive its brand has backfired. 

...But BUD Still Climbs After Earnings 

Despite all the company's missteps, Bud Light parent AB InBev (BUD 0.00%↑) closed up 5.26% yesterday after reporting mixed earnings. Unfortunately for us, we bet against BUD before earnings, so our bearish trade against them is currently underwater. 

That prompted us to review our process to see if we might have avoided making this trade. It turns out that we could have, by doing a better job of assessing the metrics we already use when making earnings trades. We also decided to add a new metric, to deal with valuation. 

Below is a look at our new process, and how it would have kept us from betting against BUD this week. 

Adding A New Metric

Up until now, we had been looking at eight different metrics for earnings trades:

• LikeFolio’s earnings score based on social data. The higher the number, the more bullish, the lower (more negative) the number, the more bearish.

• Portfolio Armor’s gauge of options market sentiment.

• Chartmill’s Setup rating. On a scale of 0-10, this is a measure of technical consolidation. For bullish trades, we want a high setup rating; for bearish trades, a lower one.

• Zacks Earnings ESP (Expected Surprise Prediction). This is a ratio of the most accurate analyst’s earnings estimate versus the consensus estimate.

• The Piotroski F-Score. A measure of financial strength on a scale from 0-9, with 9 being best.

• Recent insider transactions.

• RSI (Relative Strength Index). A technical measure of whether a stock is overbought or oversold. We’re looking for RSI levels below 70 for bullish trades and above 30 for bearish ones.

• Short Interest (noted when 10% or higher).

We decided to add another metric to that mix: Chartmill’s Valuation Rating, which incorporates several valuation ratios and, like its setup rating, is on a scale of 0-10. It seems like a good complement to RSI, in that an oversold stock that is also undervalued might attract value investors, while an oversold stock that is still pricey according to P/E, PEG, Enterprise Value/EBITDA, etc. might have to fall further to attract the interest of the cigar butt crowd.

Quantifying Our Disparate Metrics

So now we have nine different metrics to look at, which we’re gathering from six different sites, and we have dozens of companies reporting per day in some cases (the graphic below just shows the “most anticipated” earnings releases).

How to boil all this info down? Look at each metric for each stock, and assign a value to it based on how bullish or bearish it is. Take the Chartmill Valuation Rating, for example. If a stock gets a 5, we’ll give that a 0 value (neutral). If it gets 6 or higher, we’ll give it a 1 to indicate that the indicator is bullish. If it gets a 4 or lower, we’ll give it a -1. If it gets a 10 or a 0, we can give it a 2 or a -2, respectively. Then we add those numbers up for all the metrics and come up with a composite score.

Applying This To BUD Before Earnings

Here’s how BUD looked on our nine metrics ahead of its earnings release:

1. Social data: -27.

2. PA Options sentiment: Neutral.

3. Setup rating: 6

4. Valuation rating: 5

5. Zacks ESP: -1.45%

6. F-Score: 6

7. Recent insider transaction(s): None in the last 12 months

8. RSI: 40

9. Short interest: 0.42%

And here’s how we would come up with a composite score for it:

So, based on all of that, we would have been neutral on BUD and not placed a bullish or bearish bet on it (instead of what we did do, which was place a bearish bet on BUD that’s currently under water).

We will be applying that approach to the trades we place later today. If you'd like a heads up when we place them, feel free to subscribe to our trading Substack/occasional email list below. 

If You Want To Stay In Touch

You can scan for optimal hedges for individual securities, find our current top ten names, and create hedged portfolios on our website. You can also follow Portfolio Armor on Twitter here, or become a free subscriber to our trading Substack using the link below (we're using that for our occasional emails now).