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 an article about stocks to be careful with going into earnings. 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) through the report, or even leading up to it.
The five names I have chosen this quarter are Apple (AAPL), Netflix (NFLX), VMware (VMW), Green Mountain Coffee Roasters (GMCR), and Tesla Motors (TSLA). How did I choose these names? Three of them are growth companies whose stocks have soared since their last reports. With such large rises in their stock prices, expectations are high, and they must deliver. Apple makes the list because in recent quarters, analysts have started to panic into earnings, cutting estimates and price targets. This has sent Apple shares lower into earnings. VMware makes the list as it is near a 52-week low because the company has issued below-expected guidance two quarters in a row.
Apple - Tuesday, July 23rd, after bell:
I expanded on this theory in my most recent Apple article. I referred to this as "panic time," where a bunch of analysts come out and cut estimates, phone builds, price targets, etc. Investors see these negative notes and sell. Apple dropped almost $20 in three days on the last set of analyst notes, and it could certainly happen again. If more analysts come in and pile on, Apple will most likely lose the $400 level again before earnings.
The real question for investors wondering what to do with Apple shares through earnings is in regards to fiscal Q4, not the fiscal Q3 they are reporting. Do you believe Apple will release a new product or multiple products during the quarter? If you believe they will, then guidance should be okay and the stock should perform well. If you believe that they won't release anything until October (fiscal Q1 of next year), then there is a high probability that guidance will miss.
Q3 will also be an unusual one for Apple, as it is possible that we see a year over year decline in quarterly revenues. Current estimates call for a 0.4% increase, and the midpoint of Apple's guidance range implied a decrease. We know that Apple's earnings per share will drop, as current expectations are for a drop of about $2 to $7.33. All eyes will be watching to see how much Apple's margins fall, but earnings per share could be boosted if Apple really started to buy back stock.
In the month before earnings, Apple has ended down in four of the past five quarters. So far in this month period leading into earnings, Apple is up 2.14%. It was actually a positive note from one analyst at Raymond James that sparked the most recent uptrend. Will it continue? It may all depend on what we hear from analysts the rest of the way.
Netflix - Monday, July 22nd, after bell:
The higher you soar, the further you can fall. While in percentage terms, a fall from $300 to $50 is the same as one from $30 to $5, doesn't the one with the $300 start seem larger? Netflix's fall from grace and rise back from the dead has been one of the most spectacular events in the past few years. Netflix closed less than $2 from its 52-week high on Tuesday, nearing $250 yet again.
It was just about a year ago when Netflix's Q2 results and Q3 guidance sent shares much lower and to a 52-week low of $52.81. Since then, subscriber growth has been decent, Carl Icahn has bought in, and a number of short sellers have fled. But with shares up almost $200 from their 52-week low, could this quarter's report be the top?
Current estimates call for 20.6% revenue growth to about $1.072 billion, and earnings per share of $0.40, up from $0.11 last year. This is also Netflix's weakest quarter of the year, but they did launch two new "original series" during the quarter. They will also be launching into the Netherlands later this year, which should impact guidance for either Q3, Q4, or both. Netflix will need a decent report and guidance to maintain this sky-high rally. If Netflix shows that original series are working and can achieve a moderate level of profitability, it would not surprise me to see shares make a run at the all-time high.
VMware - Tuesday, July 23rd, after bell:
VMware is close to a 52-week low, and that's why I've argued this name has something to prove this quarter. The company has issued disappointing guidance the last two quarters, sending the stock from the high $90s to the mid $60s. In 2013, VMware has actually lost more than Apple has. How many investors realize that fact?
Currently, analysts are expecting $1.23 billion in revenues for the quarter, which is right in line with the company's $1.21 billion to $1.24 billion guidance range. For the year, analysts are at $5.17 billion, slightly below the $5.12 billion to $5.24 billion company guidance midpoint. Q2 revenue growth could fall into the single digits, while I'm sure the company hopes to keep the number in double digits. VMware needs to deliver a solid quarter and guidance if they want shares to recover. If the yearly forecast is taken down again, this stock could drop into the $50s. That seemed unimaginable six months ago.
Green Mountain Coffee Roasters - date TBA:
Green Mountain is in the same camp as Netflix, a huge rally propping the stock to multi-year highs. Last August, Green Mountain barely traded for more than $15, and the recent high is $82.95. While shares are off their highs, they could easily be back there before earnings.
Last quarter, Green Mountain used a deal with Starbucks (SBUX) to hide a poor report. Green Mountain missed its own guidance for the quarter and lowered yearly guidance due to bagged coffee weakness. But a large jump in margins combined with the share buyback helped them blowout earnings, and the Starbucks deal made investors very happy. Shares were below $60 at the time, and were above $80 just four days later.
This time around, there most likely won't be a Starbucks deal to hide a poor report. It will all come down to results and guidance. If the company has a revenue miss or weak guidance, the stock will probably fall. With a stock as volatile as this one, I'd suggest that investors use options as possible if they want to trade earnings. While you can lose a lot more in percentage terms, an options contract may only cost you like $500 for 100 shares. You'd have a lot less at risk than the roughly $7,500 it might cost you for 100 actual shares.
Tesla Motors - date TBA:
The electric car maker hit another new high on Tuesday after being selected to join the Nasdaq 100 index. Shares hit $125 during the day, well above the $35 level we saw just four months ago. It has been one of the most spectacular rallies in recent history, thanks to a quarterly profit, debt/equity raise, and some short covering.
The huge rally has pushed this company's valuation through the roof, as it now trades for about 6 times next year's expected sales. Even for a company with this type of growth, that's a hefty price. Current expectations call for 26% revenue growth next year after 357% growth this year. In comparison, General Motors (GM) and Ford (F), which are growing revenues in the single digits, trade for less than 0.5 times next year's revenues.
It's not that I have anything against Tesla, and I do think there is the potential for the company to grow. However, the stock may have run too much, and many of the shorts have covered already (an update on short interest is due out soon). If Tesla ends up running to like $150 before earnings, I'd be very cautious going into that report. It could be a classic case of "buy the rumor, sell the news," with investors taking profits afterwards.
Three of the names on this list have rallied very strongly, and their earnings reports will need to justify those rallies. Netflix needs to show its sub base is growing strong, while Tesla and Green Mountain need to prove their growth stories are intact. Apple shares could go lower if analysts continue to issue negative notes into the quarterly report. VMware will be looking to rebound from its 52-week low, but to do so it cannot lower its revenue forecast again.
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.