Fourth-quarter earnings season is approaching quickly as major stock indexes, along with several top-rated growth stocks, continue to show strength near highs.
Last week, we looked at some top performers in the IBD 50 that are expected to report more strong growth in Q4. This week, the focus turns to the IBD Big Cap 20, a stringent screen of top-performing large-cap stocks with strong fundamentals that are also leading price performers.
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Earnings dates are still a few weeks away for several high-quality names in the Big Cap 20, including enterprise software giant HubSpot (HUBS), which is holdings gain well since it gapped up on Nov. 7, the last time it reported earnings. The company operates a cloud-based customer relationship management platform that helps small- to mid-sized businesses manage, respond and connect with their customers.
In Q3, total revenue increased 20% year over year to $669.7 million, well above prior guidance of $646 million to $647 million. The top-line growth was helped by recent AI offerings like Breeze and Breeze Intelligence. HubSpot also cited strong demand for its freemium model, which is attracting new users who transition to paid plans.
Adjusted profit jumped 35% to $2.18 a share, while cash flow from operations surged 79% to $159.5 million.
Wall Street seems optimistic about Q4 results as well, as the stock trades tightly near highs. The FactSet consensus is for adjusted profit of $2.19 a share, up 24%. Revenue growth is expected to slow slightly, up 16% to $673.7 million. HubSpot reported Q4 results on Feb. 14, which gives investors an idea of when to expect the next report.
Watching Fortinet, Axon
Elsewhere, while Palo Alto Networks (PANW) and Zscaler (ZS) have started to lag in the security software group, Big Cap 20 stock Fortinet (FTNT) continues to show strength after a positive reaction to earnings on Nov. 8 that saw shares surge 10%.
Similar to HubSpot, Fortinet has held on to the bulk of those post-earnings gains after a brief drop below its 21-day exponential moving average Dec. 18. Two days later, Fortinet reversed higher above its 21-day line in strong volume.
In November, investors cheered news that earnings and revenue growth accelerated for the second straight quarter, up 54% and 13%, respectively. Non-GAAP operating margin hit 36.1%, a record for the company, and well above prior margin guidance of 30.5% to 31.5%.
For the fourth quarter, adjusted profit is expected to rise 20% to 61 cents a share, with revenue up 13% to just over $1.59 billion. Fortinet released Q4 results on Feb. 6.
Axon Eyes AI
Meanwhile, Axon Enterprise (AXON) is another pillar of strength in the Big Cap 20 after a huge earnings move in November. Shares soared nearly 30% on Nov. 8 after the maker of Tasers and Axon body cameras handily beat estimates and offered up a strong Q4 and full-year outlook.
Quarterly profit increased 38% to $1.45 a share, with revenue up 32% to $544.3 million. Taser revenue increased 36% to $222 million, helped by strong demand for the new Taser 10. Cloud & Services revenue rose 36% to $203 million, driven by growing adoption of Axon Evidence. Sensors & Other revenue picked up 18% to $120 million.
For the full year, Axon raised its revenue guidance slightly to $2.07 billion, which would be an increase of 32% from 2023.
As part of the earnings release, CEO Rick Smith commented on Axon’s AI efforts and the Q4 launch of the company’s AI Era Plan:
“Axon AI represents not just a single product, but a commitment to continuous innovation for our customers. We have developed a suite of AI-powered products and solutions designed to evolve with the demands of modern law enforcement — and our portfolio is only growing. As new capabilities emerge, we intend to integrate them seamlessly into our hardware and software solutions, enhancing our customers’ workflows. This will enable officers to work smarter, faster, and more efficiently — driving real change in public safety.”
Axon last reported Q4 results in late February. For the current quarter, analysts are modeling profit of $1.40 a share, up 25%. Revenue is expected to increase 31% to $566.8 million.
Options Trading Strategy
HubSpot, Fortinet and Axon could make sense for call-option trades as the earnings dates approach.
A basic options trading strategy around earnings — using call options — allows you to buy a stock at a predetermined price without taking a lot of risk. Here’s how the option trading strategy works:
First, identify top-rated stocks with a bullish chart. Some might be setting up in sound early-stage bases. Others might’ve broken out already and are getting support at their 10-week lines for the first time. And a few might be trading tightly near highs and are refusing to give up much ground. Avoid extended stocks that are too far past proper entry points.
A call option is a bullish bet on a stock. Put options are bearish bets. One call option contract gives the holder the right to buy 100 shares of a stock at a specified level, known as the strike price.
Choose Options With Liquidity
Once you’ve identified a bullish setup in the earnings calendar, check strike prices with your online trading platform, or at Cboe.com. Also, make sure the option is liquid with a relatively tight spread between the bid and ask.
Look for a strike price just above the underlying stock price — that’s out of the money — and check the premium. Ideally, the premium should not exceed 4% of the underlying stock price at the time. In some cases, an in-the-money strike price is OK as long as the premium isn’t too expensive.
Choose an expiration date that fits your risk objective. But keep in mind that time is money in the options market. Near-term expiration dates will have cheaper premiums than those further out. Buying time in the options market comes at a higher cost.
Follow Ken Shreve on X/Twitter @IBD_KShreve for more stock market analysis and insight.
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