This is the sixth in my pre-earnings series on “momentum movers”—stocks which have made large, and even parabolic price moves in the past. A few years ago, my Twitter stock guru pointed out that when a stock has a history of advancing quickly, history frequently repeats itself, and earnings often serve as a catalyst for those moves. Since then, I’ve kept a watch list of these issues.
Here are three snapshots of momentum movers scheduled to report earnings next week, and my handicap of how their stock prices might perform. Don’t be surprised to see them in play leading up to (and after) their reported earnings.
Krispy Kreme Doughnuts (KKD, Scheduled to Report May 23)
Do you like doughnuts? I do. And Krispy Kreme makes really good, fresh, rich ones. In fact, that’s how KKD stock traded when it first hit the market—good and rich. Long gone, however, are the days when KKD stock was rising faster than doughnut dough. In fact, you have to go back to 2003 when KKD was at its height—sweetening investors' accounts at almost $50 per share, three years after it had gone public at $21 per share. From that nadir, the stock slid dramatically until it finally found “support” at the $7 level, briefly. Then it ping-ponged its way from $7 - $12, $12 to $3, $3 to $5, $5 to $1 and back up to about $6.25 per share, where it now stands.
From a business standpoint, Krispy Kreme simply got too bloated on its own doughnuts, expanding from an extremely successful business in the southern U.S. to an overly-ambitious national assault on America’s substantial numbers of doughnut eaters. Unable to keep pace with the obese costs associated with the company’s growth strategy, earnings went on a diet, and Krispy Kreme flirted with bankruptcy.
My prediction: The company has made an admirable stand simply to stay afloat, but the hype is gone, and so is the growth at any cost philosophy of company management. Good earnings may provide a brief catalyst for the stock price to ascend—but a 54 million share float with only 3.36 million shares sold short isn’t the greatest equation for momentum buying. That said, I would definitely keep an eye on KKD shares when Dunkin’ Donuts’ IPO hits the market latest this year. If that one fattens traders’ coffers, KKD might work as an excellent sympathy play. Last week it was coffee. Perhaps the doughnut sector will follow!
Pacific Sunwear (PSUN, Scheduled to Report May 24)
I live in California, where Pacific Sunwear stores have been a mainstay in urban and suburban malls for as long as I can remember. The company sells t-shirts, jeans and other apparel and accessories targeting the mercurial teen market, with an emphasis on skating and surfing. Thanks to less than stellar earnings (-1.49 per share last year) and flagging same-store sales, PSUN stock has been absolutely hammered over the past year (down about 30%) and took an especially hard hit this past quarter (down more than 20%). Interestingly, insiders have been snatching up shares of PSUN like they’re gold.
My prediction: With a relatively small public float of 35 million shares, massive short interest of 10 million shares, and extreme insider buying, I expect earnings to give shares of PSUN a significant boost. Whether they can maintain an upward trajectory like shares of fellow retailers HOTT or CPWM remains to be seen. But I’m leaning long and strong on PSUN, based on the short-squeeze potential alone.
TIVO (TIVO, Scheduled to Report May 24)
When my wife and I want to record something on our cable box, with built-in DVR, we refer to the act as “TIVOing.” The only problem is, we didn’t buy a TIVO box. We rented a generic DVR from our cable company. And that seems to be a huge drag on TIVO’s bottom line. Unlike Kleenex, which is synonymous with bathroom tissue, TIVO’s sales haven’t matched its brand-name recognition. Despite banking almost $220 million in revenue in 2010, TIVO lost a whopping $84.5 million last year, and the company has lost money 10 out of the last 11 years. Competition in this space is also fierce, with DISH, regional cable providers, and the constantly changing face of home entertainment posing formidable challenges to TIVO.
The stock, which is heavily shorted, can pop on a moment’s notice—usually triggered by a victory in one of TIVO’s many legal battles waged to protect its technology. But the pattern of popping then dropping has repeated itself over and over again, resulting in dizzying highs and ulcerating lows for those courageous enough to trade or invest in TIVO stock.
My prediction: Barring an acquisition, major court victory or an unlikely earnings blow-out, TIVO shares are dead in the water, as is the company. Burdened by a heavy float of almost 115 million shares, the only time TIVO stock accelerates is when holders of the almost 18 million short shares panic and cover on breaking legal noise related to TIVO’s court battles. If you’re waiting around for a TIVO short squeeze, or a suitor like Microsoft to rescue your TIVO trade or investment, you’ll probably be waiting a long time. Sadly, you can’t hit “rewind” after you open a position in a stock that goes bad. In the case of TIVO, you’ll just end up “deleting” money from your investment account.
Good luck and trade carefully!