6 Stocks To Be Careful With Going Into Earnings

by: Bill Maurer

We've all heard the expression, "don't catch a falling knife" with regard to the stock wisdom that you don't want to try to play a rebound in a stock that's continually falling. Well, there's another one I like to live by, and I sum it up as "Where can the elevator go from the top floor?" And the only answer is, down. Why do I say this? Well, there's a few stocks reporting in the next week or so that I think you should be very careful with, some because of potential bad quarters and others because of huge run ups. So here's the names I'll be watching closely.

Apple (NASDAQ:AAPL): For a preview of Apple's earnings, read my article on some critical numbers to watch. Apple is a great company, I don't think anyone would argue otherwise. I am not arguing that point. Since Apple has a history of providing extremely conservative guidance, people could get worried if it does it again. But that's not my main concern. My worry with Apple is that we've seen the classic buy the rumor, sell the news event, and that the stock could potentially sell off after earnings. Just two weeks ago, we were at $354 a share. I even recommended buying Apple at $375. And that was a great call. But now we're at $420. A $65 move in two weeks, in percentage terms that's almost 20%. It's very well possible that Apple could be at $430 or even $440 before the earnings come out. And that will severely limit your upside. I would rather miss 20 points of upside here than to buy too high and lose 30 right off the bat. If Apple does drop back down to $400 or lower, then you get a great entry point.

Baidu (NASDAQ:BIDU): Investing in China is always dangerous because you never know what regulations the government will slap down next. That being said, Baidu has been one stock that's done well over the past few years, in a space where many companies come crashing down. Recently, fears over another round of government regulation in the internet space and news of U.S. authorities starting to investigate certain Chinese companies caused Baidu to fall like many of its peers. The stock went from $150 to nearly $100. And that turned out to be a great buying opportunity. Now to be fair, I did pitch the stock at around $141, which is a few points north of where we are currently. And the stock did jump up to that $150 level as I said. I still think Baidu has plenty of room to grow, and with the average analyst price target around $191, so do they. But this stock is up 35% in the past two weeks. Baidu jumped $5 on Friday after the great report from Google (NASDAQ:GOOG). Baidu doesn't report until after the bell on the 27th, so you still have some time to see where it goes in the next 10 days. If we see a run up towards $150 or so before earnings, I would be extremely cautious. It might even be worth buying some put protection just in case. I still love the company and its growth potential, but we are due for a pullback, and I just can't pitch a name up 35% in two weeks.

Cree (NASDAQ:CREE): Cree is down 10% after an analyst from Morgan Stanley said to expect a selloff after Tuesday's earnings. The analyst believes that earnings estimates are too high due to an underestimation of operating expenses from Cree's recent acquisition of Ruud lighting. Cree has missed expectations in two of the past four quarters, and its revenue numbers have been a main problem in the past year or two. Cree's stock ran up in late 2009 but revenues and earnings did not move in line, and the stock has fallen from the mid $80s to the mid $20s since then. This downgrade hit the stock hard Monday, which may lighten up some of the blow if a bad quarter does come out. However, as the analyst and I both agree, this company is in good shape for the long term. Use a drop in the stock to accumulate at low levels, especially if you can get in around $20 (would be a serious drop from here). Given the recent earnings misses and the questions over its large inventory balance, I would only enter a full long position before Tuesday afternoon's announcement. If you want to speculate that this report Monday morning is wrong and the stock may jump from its low levels, I would only use options so as to limit your risk.

Amazon (NASDAQ:AMZN): A couple of weeks ago, I wrote an article praising Amazon as a company but saying I couldn't agree with the stock's valuation. At that point, Amazon was around $225. It is now north of $240. And in that time frame, analyst estimates for the stock have come down another penny or two for both 2011 and 2012. Amazon is trading at about 76 times 2012 earnings, and that's a lot. Additionally, gas prices are down about 15 cents a gallon over the past month. They are on the rise back up however, with oil and gas futures prices rising in recent weeks; we have seen some pullback at the pump. These extra couple of weeks of lower gas prices probably encouraged some more store trips, and although the impact on Amazon's revenues will probably be minor, it's still something to note. Gas prices are still up 23% over last year, which does favor Amazon, but if they stay near $3.50 people might just go out more. Remember, the national average was about $3.70 for most of the summer, and we were close to $4.00 earlier in the spring. Like many of its peers, Amazon is up 20% over the past two weeks in this recent market rally. A pullback into next Tuesday's (25th - after the bell) earnings would be welcomed, but like I've said before, I would be very cautious if this name heads higher in the next week. At some point, this P/E number will catch up to the stock. The stock is up $30 over the past 90 days, but 2012 earnings estimates have gone from $3.79 to $3.20. Be careful at these lofty levels.

Intuitive Surgical (NASDAQ:ISRG): For most of the past 6 months, Intuitive has been stuck in the $340 to $390 range, so my caution lies with us at the top end of that range. This company, for those of you who are unfamiliar with it, makes surgical robots for hospitals. The company does not make a lot of money off the robot itself, rather on the additional equipment and services it provides after the robot has been installed. These extra devices and upgrades have very high margins. Intuitive has always been a favorite of mine, and I love to play the earnings. However, I have seen it multiple times run up before earnings only to crash down afterwards, even if the earnings report was good. Being that these are premium products, hospitals may tend to slow down spending if we do get another recession. I would be extremely hesitant to buy the stock at these levels. At most, I see only about $25 to $30 of upside, while a bad report could push this stock back down to $300 in the next few weeks. The options aren't extremely expensive if you want to make a one directional prediction. But otherwise, I'd short the name if it rallies back to $425, and buy it in the low $300s.

Netflix (NASDAQ:NFLX): Everyone's favorite growth story until it wasn't will report its earnings on Monday, October 24th, after the bell. We all know that Netflix has been hit hard recently, and even with Netflix at $225 people were saying it was worth less than $100. Well, next week, they may just be right. Netflix revised its subscriber guidance downward from 25 million to 24 million in September, then flopped again over spinning off its DVD only business, which eventually it decided not to do. I'm hoping for a terrible quarter. I'd love to see the stock get punished again. Why? Because I think it would create an excellent buying opportunity. Netflix has acquired some new content lately, and it would be nice to see it get on board with Starz again. But Netflix still has plenty of growth opportunities ahead. It can easily grow its subscriber base in the U.S., and last quarter, the company had less than one million international subscribers. There is a ton of room for growth internationally, which will take some time to develop. In two months, Netflix has lost half of its value. Even a so-so earnings report will knock the stock down again. But this was the repricing we were all waiting for. Now that it's here, I wouldn't want to miss the opportunity. But like I said in my intro, don't try to catch a falling knife. The recent low $103 can easily be met in a day, and the stock could go a bit lower than that. This is an important quarterly report for the company, and I just cannot buy the stock before it.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AAPL, CREE over the next 72 hours.