Hot Earnings ‘Loser’ PG&E Corp Can Still Offer Upside For Speculators - PG&E (NYSE:PCG)

As a general principle, a bet on publicly traded companies that miss quarterly earnings and sales targets typically doesn't perform well after disclosure. However, some oddities exist, including utility giant PG&E Corp PCG. Although the entity technically failed to meet expectations, PCG stock has been a hot commodity, swinging higher following the results. While some traders may be reluctant to buy into strength, there could be an empirical case for sustained near-term bullishness.

On paper, circumstances don't necessarily look auspicious. On July 31, PG&E posted earnings per share of 31 cents for the second quarter, missing the consensus estimate of 36 cents. In the year-ago quarter, the company also reported earnings of 31 cents per share. Circumstances didn't improve on the top line, with the utility generating $5.90 billion. This too missed the consensus target, which stood at $6.37 billion. Last year, the company rang up revenue of $5.99 billion.

Still, investors were undeterred by the top-and-bottom-line misses. On a CNBC broadcast last week, Jim Lebenthal, partner at Cerity Partners, expressed interest in trading PCG stock. It would seem that the rest of the market agrees with the expert's optimism.

While the headline statistics weren't pleasant, investors seemed to be reading between the lines and finding the silver lining. For me, the biggest line item that stood out in PG&E's second-quarter press release is the data center pipeline, which increased to 10 gigawatts. In addition, the company stated that it connected over 3,300 electric customers and over 2,000 new electric vehicle charging ports to the utility's grid.

Fundamentally, both EVs and data centers represent huge forward catalysts for the utility industry. Perhaps most notably, tech juggernaut Meta Platforms earlier inked a deal with Constellation Energy Corp CEG, reflecting the massive energy demand stemming from hyperscale data centers.

Narrowing Down a Realistic Forecast for PCG Stock

Although PCG stock arguably benefits from a fundamentally strong narrative, converting such storylines into an actionable framework for options traders is incredibly difficult. Typically, bullish analysts will note that because the target security trades below a projected valuation ratio, it represents "good value" or a similar label. Aside from smuggling the conclusion (that the stock will rise) into the premise (that the analyst knows the stock's correct value), this standard methodology is also a category error.

When analysts use labels such as "good value" or similar phrases to describe an investment opportunity, it necessarily implies that, at some point, the stock will become "fair value." Eventually, it will surpass that threshold and become "overvalued" — or to use the diplomatic lexicon, it will carry a "rich premium."

But the category error is that these discrete labels such as "good value" or "rich premium" are derived from continuous scalar signals, such as share prices and earnings. A stock price doesn't have objective meaning. So, for such analyses to even have a chance of sticking, the expert broadcasting the view must define the terms. And those terms must then be assessed for empirical validity — otherwise, it's not analysis but rhetorical hand-waving.

Just about the only objective truth in the equities sector is that, at the end of the day, the market is either a net buyer or net seller. From this binary reality, we can look for quantitative signals and the possibility of an asymmetric edge.

In the past 10 weeks, the market voted to buy PCG stock six times and sell four times. During this period, it incurred a downward trajectory. For brevity, we can label this sequence as 6-4-D. It's an unusual sequence since the balance of accumulative sessions outweighs distributive, yet the trajectory is negative. Still, based on past analogs, this pattern more often than not represents a reversal signal.

But before acting on the signal, we must make sure that the edge is justified. Because the stock market is an open and entropic system, it's vulnerable to exogenous factors that no risk model can reliably predict. Therefore, we want to give ourselves as strong of a fighting chance as possible.

To do this, we must consider the baseline probability of PCG stock, the chance that a long position will be profitable on any given week. This null hypothesis — or the assumption of no mispricing — happens to be 53.91%, which is a solid upward bias. However, the alternative hypothesis is that because of the flashing of the 6-4-D sequence, the upside probability stands at 72.22%.

Basically, with Monday's pop higher in PCG stock, the probabilistic implications of the 6-4-D came true. My contention moving forward is that there's still some upside to be had. The median return assuming the positive pathway is 2.25%. Should the bulls maintain control of the market for the next four weeks, there could be an additional boost of 1.3%.

Putting the Math Together

Using the closing price of $15 on Friday, PCG would be projected to reach around $15.34 sometime this week or next, which is a very realistic target given Monday's rise. Assuming bullish control, PCG could then march toward $15.54. However, given the fundamental optimism surrounding hyperscale data centers, I think a price target of around $16 is reasonable.

With that said, the 15/16 bull call spread expiring Sep. 19 is aggressive but within the outer edges of rationality. This transaction involves buying the $15 call and simultaneously selling the $16 call, for a net debit paid of $50 (the most that can be lost in the trade). Should PCG stock rise through the short strike price ($16) at expiration, the maximum profit is also $50, a 100% payout.

Of course, the bullish narrative hinges on the strength of the 6-4-D sequence. Running a one-tailed binomial test reveals a p-value of 0.0916, which means that there's a 9.16% chance that the implications of the signal could materialize randomly as opposed to intentionally.

In fairness, if we were operating a biotech lab, our drug would be laughed out of clinical testing. However, because of the unpredictable exogenous factors in the stock market, I believe a p-value south of 0.20 is empirically intriguing. In other words, there's probably more here than just random noise — and bullish speculators could have a chance to scalp some profits.

The opinions and views expressed in this content are those of the individual author and do not necessarily reflect the views of Benzinga. Benzinga is not responsible for the accuracy or reliability of any information provided herein. This content is for informational purposes only and should not be misconstrued as investment advice or a recommendation to buy or sell any security. Readers are asked not to rely on the opinions or information herein, and encouraged to do their own due diligence before making investing decisions.

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