Earnings season officially kicks off this week with 13 S&P 500 companies and one Dow component reporting first-quarter results. And while investors are setting a low bar for earnings, one trader says there are three Dow stocks that have the potential to shake up the market in the very near future.
"Many of these stocks don't have above-average implied moves, but three notable stocks did: Caterpillar, IBM and McDonald's," Optimize Advisors co-founder Mike Khouw said Monday on CNBC's "Fast Money." Options traders use at-the-money put and call strike prices to estimate how much a stock will move for a given event.
According to Khouw, IBM, which reports on April 18 after the bell, could see a move of nearly 5 percent in either direction, in comparison to its historical average of 4 percent. Its shares are up 13 percent in the past three months. As far as which direction the stock could move, Khouw noted that he is less than optimistic. "I'm having hard time understanding how they're fixing the decline in their legacy business, I'm going to call a decline on that one," he said.
Caterpillar is out with earnings on April 22 before the bell, and options traders are also betting on a 5 percent move in either direction. On a typical earnings report, the company's shares average a move of 4 percent. "Caterpillar in particular is dealing with the commodity super cycle. I think that stock was quite depressed. I'm actually going to make a bet to the upside," said Khouw. Shares of Caterpillar are down more than 7 percent in the last 12 months.
Meanwhile, McDonald's could move 3 percent in either direction when it reports on April 22, also before the bell, and Khouw sees some healthy profits for the stock. "Management with the all-day breakfast seems to have done a good job there so I'm going to call it to the upside there."
Together, the implied moves for these stocks could represent about a $12 billion shift in market cap for the Dow. "We're talking about a move of about $6.7 billion for IBM, $2 billion for Caterpillar and about $3.7 billion for McDonald's, so big swings in market cap probably because these companies have things going on individually that make them particularly interesting to look at," Khouw said.