Here's how Goldman Sachs is playing earnings season: Buy Netflix, sell Tesla

Key Points
  • Goldman Sachs estimated that stocks could have an intraday move of 7.4 percent on average in this earnings season.
  • The bank sees upside for Netflix, CBOE and LPL Financial, and downside for Tesla and Yum.
Reed Hastings, chief executive officer of Netflix Inc.
Akio Kon | Bloomberg | Getty Images

This earnings season is bound to be a wild one, according to analysis by Goldman Sachs, but it has a game plan for clients to navigate it.

Based on options prices, stocks in the S&P 500 have an average implied intraday move of more than 7 percent in either direction.

"We believe earnings season is the time when fundamental investors have the biggest advantage over quants or macro investors," John Marshall, a derivatives analyst, said in a note Sunday. We "selected those stocks that our analysts believe are most likely to react in the direction of their earnings view," he said.

The earnings season kicked off Monday as Citigroup posted fourth-quarter revenue that missed analysts' estimates by a half-billion dollars, the first among U.S. banks to report results. Goldman Sachs previously predicted that 2019 earnings growth will be quite disappointing because of slow economic growth, a strong dollar and low oil prices.

Below are companies it believes will pop or drop based on earnings. In the report, it highlights specific call options to buy for the bullish calls and put options to buy for the negative.

Buy Netflix

Netflix's 33 percent pullback in the second half of 2018 represents the "best buying opportunity in internet," said Goldman Sachs internet analyst Heath Terry.

"The company's investment in content, technology and distribution will drive subscriber growth well above consensus expectations, both in the U.S. and internationally," Terry added.

Goldman Sachs is seeing an 18 percent gain for Netflix over the next 12 months, joining a chorus of bullish commentary from Wall Street on the video streaming giant. Shares of Netflix have gained more than 26 percent in the new year.

Sell Tesla

Goldman Sachs expects Tesla to drop 35 percent over the next 12 months, citing challenges to operational execution and sustainable Model 3 demand.

"The company's operational execution has been more challenged, and sustainable Model 3 demand may be lower than Street expectations at the currently offered vehicle price point," Goldman Sachs automobiles analyst David Tamberrino said.

In addition, competition in the electric vehicle space is getting more fierce as other companies launch electric vehicle models and incentives, Tamberrino added.

Tesla in January reported 90,700 vehicle deliveries for the fourth quarter, which missed the Wall Street estimate. The company's stock tumbled 5 percent in December and is up about 6 percent in the new year.

Buy Cboe, LPL Financial

The recent surge in market volatility is beneficial to Cboe Global Markets, which owns the Chicago Board Options Exchange and the stock exchange operator BATS Global Markets, according to Goldman Sachs capital markets analyst Alex Blostein.

The bank is predicting a 31 percent gain for Cboe's stock over the next 12 months. Shares of Cboe have plummeted more than 30 percent in the past 12 months.

"Investor expectations for VIX growth have rebased. ... Momentum in options is underappreciated amid increased demand for institutional hedging, share gains against other listed products, and cyclical upturn in equity volatility," Blostein said.

His earnings per share estimates for 2019 and 2020 are $5.24 and $5.75, 6 percent and 8 percent, respectively, above FactSet consensus.

LPL Financial is the bank's top pick among small- to mid-cap brokers given its improving organic growth, favorable mix shift between channels and growth in cash balances.

Goldman Sachs sees 9 percent upside for LPL over the next 12 months. LPL beat the market last year, posting a 6.9 percent gain while the S&P 500 was down 6 percent.

Sell Yum

Yum Brands is under pressure from multiple fronts, including rising rates, wages and credit availability, according to Goldman Sachs restaurants analyst Karen Holthouse, who sees 16 percent downside over the next 12 months.

"Yum's outlook for 4 percent unit growth in 2018 and expectations of acceleration screens poorly versus the rest of the highly franchised coverage," Holthouse said.

For the quarter, the bank's EPS estimate is 5 percent, below Wall Street consensus. Shares of Yum are down about 2 percent in January, after a strong 2018 that saw a more than 12 percent gain.

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