As earnings season is about to hit us with its full force, investors need to be prepared. As part of my earnings coverage each quarter, I always do a pre-earnings season article about stocks to be careful with going into earnings. Originally, the segment was focused on stocks to not be long through earnings. The segment has evolved, adding stocks to not be short through earnings, along with possible trades for these names when they report. I also will include stocks to just plain avoid at certain times. But there is one important point, or disclaimer, I must make. Just because I say be careful with a stock going into earnings, doesn't necessarily mean that longs (and shorts potentially as well) should exit their positions before earnings. It simply means that there are certain items you need to think about before deciding on what position to hold (or not) going into the report. This quarter, I will discuss ten names. In Part One, I discussed Apple (AAPL), Deckers Outdoor (DECK), lululemon (LULU), Groupon (GRPN), and Baidu (BIDU). Here is part two.
Amazon (AMZN) - Tuesday, January 29, after bell:
Amazon makes this list for a couple of reasons. First, the company is expected to post another year over year decline in quarterly earnings, a pattern that has continued for quite some time now. If Amazon meets current expectations, the company will post a loss for the 2012 fiscal year. Yes, a company that is expected to do more than $62 billion in revenues, up nearly 30% from the prior year, may actually lose money. Amazon's profits have been dwindling for some time now.
But the second reason is an interesting way this stock has traded around earnings. Over the last couple of quarters, we've seen Amazon fall in the extended hours session, on what usually is poor guidance. But then the stock seems to recover. Last quarter, Amazon went into the report trading just under $223. After the report, the stock dropped below $205, but started recovering. The next day, Amazon closed above $238, a rally of more than $30, or 15% from the low. I'm not suggesting this will definitely happen again, but we've seen this happen a few times over the past two years.
Amazon investors only seem to be concerned with the company's revenue growth, and net income doesn't matter. The stock is just a few bucks from an all-time high currently, despite earnings being at their lowest point in several years. Amazon seems willing to spend spend spend to get revenues, even if it costs them more. They are engaged in a costly content battle with Netflix (NFLX), and their recent debt issue will mean added interest costs. Everyone is waiting for the quarter where Amazon finally starts to drop. Will this be the one?
Intuitive Surgical (ISRG) - Tuesday, January 22, after bell:
Sometimes, you have to recommend a stock shorts should stay away from. That gets me to the surgical robot maker known for its da Vinci surgical system. Intuitive is the leader in surgical robots, has almost no competition, as well as sky high margins. The company has been extremely profitable and has blown past estimates in almost every quarter. That has allowed the company to be flush with cash, and have one of the best balance sheets out there.
If I had to choose one company that I knew would beat estimates, I would have to choose Intuitive because of its history of doing so. The stock is down 10% over the past month, so I think the stock will rally on good news. This stock has sold off on good news before, but usually when it goes into a report at or near a high. We're about $100 away from a high, so I don't think we have to worry about that. Only 7% of the float was short at the end of December, so this is not a company that a ton of people like to bet against.
Netflix - Wednesday, January 23, after bell:
When it comes to Netflix, you probably can see a crowd of bulls and bears playing a game of tug of war. Netflix has been one of the hottest debate stocks over the past few years, and rightly so. The company's price hike and questionable management decisions sent a $300 stock to nearly $50. Since that 52-week low, Netflix has nearly doubled, on the backs of a deal with Disney (DIS), and Carl Icahn taking a position in the name.
But the Disney deal doesn't start for a couple of years, and some of the new content deals don't start until 2014. Carl Icahn buying shares doesn't help sign up subscribers or cut operating expenses. Netflix shares have soared, but we haven't gotten any news to make this company too much more valuable today. In fact, Netflix is trading at more than 240 times this year's expected earnings, and that is an earnings level expected to be 90% below that of 2011. Netflix is expected to widely miss its subscriber goal for 2012, and margins are falling as the company moves to a lower-margin streaming business. Netflix has disappointed investors at its quarterly report several times, so bears are lining up for the upcoming report. But if Netflix surprises, this stock will be off and running even more. For those that don't like risk, you will want to avoid Netflix around earning. It will move, and quickly.
Facebook (FB) - Wednesday, January 30, after bell:
Facebook's earnings report could represent the "buy the rumor, sell the news" theory. Just recently, we saw Facebook shares run up into the company's event. After Facebook released Graph Search, the stock declined on the news. A decline seemed inevitable, after the stock rallied from $19 to $32.
As I said in the above Facebook article, Facebook analysts have been raising their estimates and price targets quite substantially in the recent months. 2013 revenue estimates are now at their highest point since Facebook went public, and earnings per share estimates are just a penny off their high. Analysts believe that Facebook has figured out their mobile strategy, and that monetization is working well. As Facebook continues towards its report, I wouldn't be surprised to see estimates continue higher. If that is the case, the stock might trend higher as well. But that lends a bit of caution. Facebook is going to have to deliver solid results, as everyone will be expecting a lot after the huge rally. Even if Facebook's results are decent, the stock might sell off just like it did when they announced Graph Search.
Green Mountain Coffee Roasters (GMCR) - Wednesday, February 6, after bell:
The k-cup coffee maker is another great debate stock. The company lowered guidance a couple of times last year after some big revenue misses, sending the stock plunging. It didn't help that hedge fund titan David Einhorn went after them as well, perhaps Einhorn's most famous short position. But Green Mountain has nearly tripled from it's post-earnings low after the company's third quarter, when it announced a huge stock buyback.
That buyback has sent shorts scrambling, and a strong fourth quarter report helped as well. From the end of November, the shares short count went from nearly 51 million to 32 million, for a company with a little over 150 million shares outstanding. That buyback is really starting to help earnings per share, and they still have a ways to go.
If Green Mountain reports a strong first quarter, I would think there is a fair chance that they up their yearly revenue forecast. Since their earnings guidance is based on the share count when they give their forecast, they could raise earnings guidance even more if they have bought back more shares. Green Mountain is another one not for the light stomach. If this company beats, the rally could be extended to $50 or more. But if this company misses, it's not out of the question to see $30 or even $25 again.
Earnings season is upon us, and the potential for huge profits is there. However, the potential for big losses is as well. One of my main goals in writing is to help investors avoid losses. I'd rather see an investor miss a small gain than hear about a huge loss that they incurred. Additionally, investors need to pay attention to a stock's movement going into earnings. Sometimes, a quarter can be great, but if the stock has run too much into earnings, you may encounter the "buy the rumor, sell the news" phenomenon.