Here Are Some Tips for Finding a Reasonably-priced and Resilient Stock in a Week Filled With Earnings Reports

As we enter a truncated trading week, our focus turns to identifying a new core holding for 2024, aligning with the ongoing release of updated earnings results on Wall Street. Additionally, we explore an alternative approach to establish a long position in the stock we identify by utilizing options.

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While the earnings season has commenced in full swing with major financials such as JPMorgan reporting, the upcoming trading week, shortened due to the Martin Luther King holiday, features relatively few companies reporting substantial moves, defined here as exceeding a 5% increase or decrease in options markets. Among companies reporting this week with market capitalizations surpassing $1 billion, only three are indicating potential fireworks.

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Options traders, inherently concerned with volatility, typically keep a close watch on impending catalysts like earnings reports and abnormal implied moves reflected in higher-than-average options prices.

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With the market signaling a lack of significant events this week, the critical question arises: What should investors be seeking? Which stocks could emerge as strong candidates for core holdings in 2024 and beyond, and why?

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Key Criteria for Identifying Core Holdings:

1. Strong Balance Sheet: A robust balance sheet with low debt, high liquidity, and a sound capital structure is often indicative of a quality company.
2. Consistent Earnings Growth: Quality companies tend to exhibit steady and predictable earnings growth over time.
3. High Profit Margins: Sustained high-profit margins can signal a competitive advantage, relative to others in the industry.
4. Good Management: The quality of a company's management, assessed through strategic decisions, corporate governance, and alignment with shareholder interests, is crucial.
5. Competitive Advantage: A sustainable competitive advantage, or a 'moat,' is essential for long-term success.
6. Sustainable Business: Sustainability, in this context, refers to a company's preparedness for future challenges, irrespective of environmental, social, and governance (ESG) practices.
7. Valuation: While not a direct measure of quality, valuation metrics like price-to-earnings, price-to-book, and free cash flow yield help avoid overpaying for quality.
8. Resilience in Downturns: Quality companies often exhibit resilience during economic downturns, outperforming weaker counterparts.
9. Sector and Industry Position: Consideration of broader industry dynamics and a company's position within its sector is crucial.
10. Historical Performance: While past performance is not indicative of future results, a history of outperforming peers and the market can be a positive sign.
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Applying these criteria, let's examine the communications sector this week.

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Communications Services Sector Overview:The communications services sector, represented by the sector ETF 'XLC,' includes prominent companies such as AT&T, Alphabet, Charter Communications, Comcast, and others.

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AT&T Analysis:AT&T, despite having a low valuation by conventional metrics, exhibits concerning characteristics. With more debt than equity, stagnant revenues, and declining net income margins, it does not align with the criteria for a quality company. While it may be a potential speculative long, it falls short of being a core holding.

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Alphabet Analysis:In contrast, Alphabet stands out with a AA+ bond rating, a robust balance sheet featuring $90 billion in net cash, and forecasted net income margins of 30%. The company operates in growth sectors such as cloud computing and artificial intelligence. Though not as cheap as AT&T, Alphabet's reasonable valuation, coupled with a strong management team and historical growth, positions it as a potential core holding.

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While Alphabet's stock approaches its all-time highs, creating a potential resistance level, it remains an attractive core holding unless key metrics deteriorate. The upcoming earnings report on January 30th may influence its trajectory.

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For those hesitant to chase the recent rally, an in-the-money call spread serves as an alternative to purchasing underlying shares, providing an opportunity to establish a long position without direct ownership.

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In conclusion, the quest for a new core holding involves meticulous consideration of various factors, and Alphabet emerges as a noteworthy candidate for 2024 based on its alignment with the outlined criteria. The approach to establish a long position through options offers a strategic alternative for investors.