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, or even leading up to it.
Apple (AAPL) - Tuesday, April 23rd, after bell:
Apple has been on this list for being Apple in past quarters, and by that I'm referring to its sheer size. When Apple was the largest US stock in market cap, it had to be on this list because its impact on the market was fairly substantial. This time around, it's different with Apple, as the company is no longer the biggest and best. Those $700, $600, and even $500 days are a bit behind us. As of Tuesday's close, Apple has fallen nearly 40% from its 52-week high.
So why is it different this time around? Well the first reason is that Apple is provided what they called more realistic guidance when they reported fiscal Q1. Apple gave a range for revenue guidance, which it is used to do. However, we expect Apple to come in close to this range of $41 to $43 billion for revenues, instead of the company lowballing guidance and then coming in well above. Apple also provided gross margin guidance in the quarterly report, as opposed to past quarters where you had to get it from the conference call.
Apple also changed things around on the bottom line. The company did not give an earnings per share target for the quarter. Instead, they gave us operating expense guidance, other income guidance, and tax rate guidance. This means that you now need to calculate your own earnings per share figure, which would be a range give the ranges of guidance as well as an unknown share count.
The other difference this time around is that so many people are counting Apple out. Apple has not launched any new products in quite a while, so everyone is wondering what's going on with Apple. With no new products yet in sight, analysts continue to take down their estimates for Apple, which is why I think the stock could take another beating. I wouldn't be surprised if we see even more negativity from analysts going into the report.
I mentioned in the above linked article that if Apple doesn't launch any products during calendar Q2 (fiscal Q3), they will likely miss current analyst estimates for fiscal Q3. For that reason, I'm a bit worried going into this report. Add that in to the fact that we don't know what "more realistic guidance" means, and this might be the most uncertainty we've seen going into an Apple report in quite some time. Apple has had trouble beating analyst estimates for both revenues and earnings lately, and another miss will not go lightly. If Apple misses or issues bad guidance, there will probably be many calls for "the death of Apple". I'm not counting them out yet, but I'm not buying this stock yet either. I'd rather let this report pass and then figure out what to do.
Netflix (NFLX) - Monday, April 22nd, after bell:
Anytime a stock basically doubles between earnings report, you have to be careful going into the next report. Netflix may be off its recent highs, but the stock is still up nearly 65% since its last earnings report. It seems that once the second quarter started, reality set in, and the stock quickly fell.
I gave Netflix all the credit in the world for reporting a great Q4 and issuing strong guidance for Q1, but they have to back this up. If "House of Cards" does not attract in the new masses that Netflix thought it would, this company will go back to being a dart board. Netflix guided to revenues of $1.004 to $1.031 billion and a profit per share of $0.00 to $0.23, and current estimates stand at $1.02 billion and $0.18, respectively. Analysts expect this company to deliver, and with a stock up 65% since the last report, they must.
Netflix has some questions to answer in this report, and I've sent them a few since they allow the general public to do so. I want to know how the competition stands against the "Netflix Top 200", which I discussed extensively in the above article. Netflix says that competition is not strong, because a name like Amazon (AMZN) only had 73 of Netflix's top 100 TV shows and top 100 movies watched in Q4. Netflix forgets that just two years ago, Amazon had 0, and Amazon has been building its content library faster than the Yankees were building their payroll during the past decade. Netflix also needs to explain their rights in relation to "House of Cards", because the series is available for pre-order on Amazon's website. Netflix will also need to discuss the recent launch of Redbox Instant, because the DVD aspect of that service will definitely impact Netflix going forward.
I can't really recommend either side of this trade going into the report. While the valuation is ridiculous and that favors the short side, Netflix certainly surprised the bears last time around and those on the wrong side of the trade got destroyed. I also really wouldn't throw all my money behind the company until they can answer some questions. Don't forget, Netflix's Q2 is the weakest quarter seasonally, so that might play into guidance a bit. Also, don't bet on a huge short squeeze this time around. Short interest in Netflix is at its lowest point in more than a year. My recommendation for Netflix is the following. If you want to be long or short going into the report, hedge your bet. You may also want to avoid the stock altogether and only use options where your dollar value at risk won't be as large.
Intuitive Surgical (ISRG) - Thursday, April 18th, after bell:
The maker of the da Vinci Surgical System has some questions to answer this time around. Over the past few months, numerous questions have been asked about the cost/benefit of the system, and the potential that complications with the system are rising. Intuitive Surgical rose to more than $580 a share after its latest report, after shaking out a round of naysayers that time as well. However, these latest reports sent the stock to a new 52-week low of $455. While shares have recovered to almost $500, they are still down a fair amount on these concerns. Expect a number of questions on the conference call, and listen carefully to what management has to say.
Intuitive has been one of the best reporting companies in the past few years, usually beating analyst estimates handily on both the top and bottom line. While that hasn't always made the stock jump for any one particular report, this stock has soared since the roughly $90 low in 2009. Additionally, this stock is still well above the pre-crisis highs in 2007, when it traded in the mid $300s.
The average analyst target is about $608 right now, implying more than 20% from current levels. Intuitive has one of the best balance sheets around, which has allowed them to recently increase the amount of their stock buyback. I expect this name to beat revenue and earnings estimates nicely when they report, but again, the conference call will be more important, and investors need to hear what management says about the company's products.
Facebook (FB) - Wednesday, May 1st, after bell:
The social media giant is one to watch this time around in terms of profitability. During last quarter's conference call, it was mentioned that expenses would likely rise 50% in 2013, outpacing revenue growth. That statement has caused analysts to cut their earnings forecast for Facebook. Non-GAAP analyst estimates (on average) have come down from $0.66 to $0.57 for the full year 2013 since that last report, and another analyst cut his numbers on Tuesday. The 57 cent estimate doesn't leave much room for growth after a 53 cent adjusted profit in 2012. At the same time, 2014 estimates have come down from $0.86 to $0.78.
Facebook shares had staged an impressive rally from the $19 level in November 2012 to more than $32 in late January 2013. Shares now trade for roughly $26.50, and were recently below $25. With the profit forecast coming down, investors have sold this name, because it still trades for almost 47 times expected 2013 non-GAAP earnings.
Facebook has undergone some changes to the site as well since the last earnings report as well. In addition to a new news feed that the company launched, Facebook has targeted the mobile sector with Facebook Home. With all of these new changes, it is easy to see why costs are running high.
I think that this is an important quarter for Facebook because we need to see how these costs materialize. If Facebook shows that they will consistently need to spend to keep users coming back, long-term profitability could be pressured. That will certainly be a drag on the stock, and you've seen that recently. As estimates have been cut, so has the stock price. Additionally, short interest in Facebook is up nearly 90% over the past two months. While the roughly 39 million shares short is still only a portion of the high we saw in 2012 (roughly 95 million), we've seen shorts start to pile back in to Facebook. That's a trend worth watching for now.
Deckers Outdoor (DECK) - date not yet announced:
The UGG maker has nearly doubled from its 52-week low, despite results not being wonderful. Deckers has issued 5 straight quarters of guidance that was below expectations, and has had two straight large revenue misses. In fact, Deckers guided to a Q1 loss that was not expected, and announced that their Q2 loss could be double that of last year's period. All of this is due to the seasonality of their business, because their operating expenses are fixed over time. This means that in lower revenue quarters, higher expenses occur, and the company opened a lot of stores recently whose expenses will hurt the bottom line in the first half of 2013.
Deckers seems to be promising a good second half of 2013, which they also did in 2012, and that did not happen. The 2013 guidance for 7% revenue growth was ahead of the 4.4% expected, and analysts are now expecting 6.8%. However, the company only sees earnings rising by 5%, less than revenues, and that is surprising given how the company has been aggressively been buying back stock. That means that margins could be stagnant at times, and Deckers' earnings guidance was a bit disappointing.
This year's winter was a bit colder than last year's, which is a good sign for Deckers, but will it carry through to Q1 sales? That is yet to be seen. Additionally, many parts of the US have seen temperatures warm up quickly in April. While Q2 is their weakest quarter due to seasonality, Deckers needs a good start to 2013 if they want to hit their full year marks. This company cannot keep promising high and delivering low, or this stock's rally will fizzle quickly. I'm surprised that the rally has lasted this long, given five straight quarterly guidance disappointments. That warning trend might not continue this time around, but only because they essentially "pre-warned" for Q2 already.
Deckers might still have a fair amount of growth ahead of them, and this is a fairly profitable company. However, a bad winter in 2011/2012 and some bad execution has left some questions regarding the name. Expectations will be high given the stock's rally, so it wouldn't be a surprise to see a pullback afterwards, even on good news.
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. Other times, like we've seen with Apple recently, it's been sell into earnings.
Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.