As Beltway bureaucrats work their way back from the brink of a self-inflicted wound to economies worldwide, it’s time to project how earnings reports will affect the stock price of “momentum movers," equities that have curried past favor with the day-trading crowd or have a history of making quick price moves.
As I’ve noted in past articles with the same theme, earnings can be a catalyst both to the upside and the downside for the stock price of these issues. If you can make a solid educated guess as to which way the price will go, it can turn out to be a good recipe for quick trading profits. On the other hand, if you’re wrong, it can be a painful lesson in the sometimes purse-punishing power of market forces.
Dunkin Brands (DNKN) is scheduled to report on August 3. Few IPOs in recent memory have been anticipated as highly as Dunkin Brands, the corporate parent of the Dunkin’ Donuts donut shop chain. In the wake of a huge run-up in the price of coffee stocks, it was only natural that DNKN debuted with much fanfare and success. It opened up about $6 from its public offering price of $19 per share and pretty much hasn’t looked back, despite volatile and mostly terrible market conditions. Trading volume has been massive, with over 45 million shares of DNKN changing hands when it debuted. That was followed by a 7 million share day, then a 2 million share day.
Interestingly, the company scheduled its earnings release for Wednesday, only a week after DNKN shares first opened for trading. That’s a pretty good indication that the underwriters are confident in what those numbers will be.
I’m willing to bet dollars to donuts that the share price of DNKN continues to rise. This is a story stock with a highly-recognizable name brand. Arguably, the market for donuts is recession-proof and perhaps even better during lean times as consumers look for cheaper food fare to whet their appetites. In addition, it wouldn’t be surprising to learn that professional short sellers took aim at DNKN during last week’s market carnage, expecting the price to collapse under the weight of the debt debacle. If so, they were wrong, and will have to pony up for DNKN shares at a higher premium to close out their losing positions. No doubt it won’t be a straight line up for DNKN’s share price, but I strongly suspect it will ultimately rise like, well, a baking donut.
LinkedIn (LNKD) is scheduled to report on August 4. Like DNKN, LinkedIn was one of the most highly anticipated IPOs to come to market in many moons. It was also one of the most hotly debated, and was in some circles greatly doubted. LNKD’s IPO was priced at what many thought was a relatively reasonable $45 per share, with demand leading to an increase in the subscription number. And because of its story as the self-described “World’s Largest Professional Network,” shares hit the market at $80 per, briefly pulled back, and recently have been bouncing $90 and $110 each during Congress’s dysfunctional debt dealings.
I spent years as a user of LinkedIn, and like most other people I know, almost always excommunicated all LinkedIn e-mails to the recycle bin without opening them. Finally, I asked a family friend who is a high-ranking executive at a large executive placement Fortune 500 company if LNKD had any real value. His eyes lit up and he told me he was urging his company to invest in a chunk of LNKD. “It’s a massive data-base of usable and valuable information, which our industry can leverage like Google leverages searches.”
Knowing and respecting the kind of knowledge and experience he brings to the table, that was enough for me. Although I don’t believe in buying and holding, I strongly believe the long-term prospects for LNKD are extremely bullish. That said, I’m extremely dubious, as to whether LNKD shares will make a bull run in response to an earnings report that may prove to be extraordinarily underwhelming. Right now, I’m neutral to bearish on LNKD, until it starts delivering the goods, which one day it will.
Mad Catz Interactive, Inc. (MCZ) is scheduled to report on August 4. Headquartered in San Diego, Mad Catz has made a wide array of accessories for various video game platforms, including PCs, iPods and other content delivery systems and sells its products (control pads, steering wheels, joysticks, light guns, microphones, memory cards, etc.) in both U.S. and international markets.
Despite the silly company handle, Mad Catz has demonstrated some serious though erratic earnings power of late. In reverse chronological order from its most recent quarter, MCZ’s gross profit has been $10.52 million, $26.4 million, $10.5 million and $5.9 million. That’s translated into net income of $1.4 million, $9.6 million, $1.1 million and (-$1.37 million) respectively.
MCZ's stock price has been sliced in half in recent months, down from a momentum-driven high of $2.39 per share to Friday’s closing price of $1.16 per share. As far as I can tell, nothing more than profit-taking and bad overall market conditions are to blame, with MCZ continuing to cut new deals with regularity.
Any decent earnings number, coupled with an improved market tone if the debt deal gets worked out, should make MCZ shares ascendant once again. When video game and related companies gain traction, they’re among the best momentum plays to own due to the high-margin nature of what they produce. On a technical basis alone, MCZ has pulled and retraced more than 50% of its gains -- mainly, I think, as a result of a terrible trading environment. Barring a significant earnings debacle, I’m bullish on MCZ at these low-dollar levels, and would be even more so if the share price breaches a buck and heads under. In my opinion, that would create a great buying opportunity and a perfect set-up for a nice bounce play.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.