In October, I published an article called "6 Stocks To Be Careful With Going Into Earnings." It was one of my most popular articles to date. Last quarter, my goal was to pick six stocks that I saw had the potential to decline, perhaps sharply, after they reported their quarterly earnings. This round, I'll give you seven names. Now I want to start with the following disclaimer, as some have misinterpreted this fact in the past. Just because a name is on this list doesn't mean a company is going to have a bad quarter. Two of the names on my list last round I expected to have great quarters. I just did not see the stocks doing well since they had experienced large run ups into earnings. I don't want to be too repetitive this quarter, so I'll only repeat two names from last quarter's list. To be different, this list will also caution you from being on the short side, or either side, of certain names going into earnings.
Apple (AAPL) - January 24th, after close: Again, I'm not expecting this name to have a bad report. I wasn't last quarter. But Apple jumped nearly $70 in the two weeks prior to last quarter's earnings, and expectations got so high that you needed a space shuttle to get above them.
When Apple reported last quarter, they guided to $37 billion in revenues and $9.30 in earnings per share. Now, they have been known for being conservative in the past with their guidance, so they could easily beat. Current expectations are for $38.28 billion and $9.87, and I would expect those numbers to rise slightly before Apple actually reports. One thing to caution on here. Apple's first quarter is an extra week this year, so when you see revenues expected to increase by 43% and EPS by a large amount, remember that there is an extra week in there when comparing your numbers.
Apple closed Friday 16 cents above where it closed the day it reported earnings last quarter. It declined about $24 the next day, but we've gained those losses back since then. Here is my position on Apple for this quarter's earnings. Long investors need to be careful if we are above $440 or so going into earnings, and shorts need to be careful if we are below $400. Apple is up $40 in the past 3 weeks, so just remember that before trying to play this quarter's earnings.
Netflix (NFLX) - January 25th, after close: Last quarter, I couldn't have been any more right about Netflix. I advised you not to buy before earnings, expecting a large drop, but said that drop could be a great buying opportunity. What happened? Netflix fell from $119 to $77. It then reached a low of $62, and has since bounced back to $86.
My recommendation this quarter is to just stay away from the company completely. Don't try to play earnings in either direction unless you really want to gamble. This company can surprise easily, we've seen plenty of double digit daily percentage moves lately, and you don't want to be on the wrong side. Netflix has not warned that its subscription numbers were going to be worse than expected, so that leaves potential upside for the bull camp.
That being said, if you had to choose a side, it would most likely need to be the short one. Currently, analyst estimates for Netflix still have the company earning a 2 cent profit in 2012, despite the fact that the company recently told us they will lose money in the year. One thing that worries me is a recent statement in which the company described itself as having "more than 20 million streaming subscribers". I don't know if they were just using a round number here, but their domestic guidance for the end of Q4 was 20 to 21.5 million domestic streaming subscribers. They also are expected to have 2 million international subscribers, so if they are not using 20 as a round number, their domestic numbers could be below expectations.
Google (GOOG): I bought Google the day of earnings and sold the day after last quarter, but I won't be doing that again this quarter. To me, Google's recent rally makes it rather expensive for my liking, and unless they announce something like a stock split, I would not be a buyer at the upper end of the range. Google has rallied $90 since last quarter's earnings, $60 of which has come since the day after earnings. These numbers also don't include the $20 we've come down off the recent high of $670 plus.
This quarter, Google is expected to see revenues rise by 31.6% to $8.38 billion. This is excluding traffic acquisition costs. However, earnings per share are only expected to rise by 19.5% according to analysts. I think analysts might be a little low on earnings per share. There is potential for a bigger beat on the bottom line than the top line in my opinion.
Google finally broke out of its two year trading range ($450 to $650) this week, and I wasn't surprised once it broke $625 (a key level of resistance during 2011). However, we've seen some negative analysts notes come out recently, with analysts questioning how Google will do in Europe. I expect a decent number from Google, and the growth is there. However, if Google remains at these higher levels, or perhaps makes a run at $700 into earnings, I would step aside. Unless the company announces a stock split, I see more room for downside than I see room for upside on this report.
MasterCard (MA) - February 2nd, before bell: MasterCard is the first name I'm recommending that shorts should be careful with into earnings. Yes, I think this is a name you can be long through earnings, and perhaps one to start buying even now.
MasterCard's revenues are growing at a nice clip, and their earnings per share are growing even faster. They've done a nice job of improving margins over the past few years, and I think that trend continues. I also think that if banks continue to increase debit card fees, we may see more credit card usage going forward.
Bears claim the valuation is too high, but over the past month, 2012 earnings per share expectations are down about 0.25%, but the stock is about $40 lower than where it was. The valuation has come down nicely. I look for this name to regain momentum after earnings, and I think there is the potential for a stock split at some point this year. In fact, I said in my 2012 predictions that I think $500 is not out of the question (potentially split adjusted).
Green Mountain Coffee Roasters (GMCR): I recently discussed my overall opinion on the company when I said expectations are too high, so for the full analysis of this one, take a look at that article. Here are some main points though. This quarter, analysts are currently expecting about 85% revenue growth, and that's higher than any growth number of the past three first quarters, and remember we are starting with a higher base number, several years into their main growth stage. Their first quarter margins have decreased over the past few years, so I am waiting to see some improvement. Also, the company faces some key issues such as high inventory levels, poor cash flow, and potential patent expiration in late 2012.
I think there is a potential for another large drop if revenues miss again. The company's growth was put into question after a nearly $50 million miss on revenues last quarter. The stock dropped, even though the bottom line miss wasn't as bad as the revenue miss. I think expectations are just way too high right now. You might think that a 75% year over year increase in revenues would be great, but if they come in with that number, they'll miss by $55 million.
Deckers Outdoor (DECK): Shares of the footwear retailer took a tumble lately after worries have piled up over their performance this quarter. I recently wrote about the possibility that this stock was a short candidate (at $90), but said when it dropped to around $75 that it would quickly bounce back to $85. It pretty much did.
The problem for Deckers is that it is too reliant on one product, it's trademark UGG brand, which accounted for 90% of their revenues in the third quarter. Temperatures, especially in the Northeast, have been a bit warm so far during the late fall and early winter, and that most likely will hurt UGG sales. Also, the start of the stock's decline was after an analyst downgrade, where the analyst stated that channel checks were not doing well. I can't confirm the following, but a commenter in my article on Deckers recently said that prices were about $10 higher this year than last year's holiday season. That would have an impact as well. Deckers has consistently beat on the bottom line recently, but there is the potential that they may not hit the expected 31% rise in revenues. The stock is decently priced on an earnings basis, but like many other growth companies, needs to make sure that the revenues are rising as expected.
Molycorp (MCP): Shares of the rare earth mineral producer and processor trade currently for just a third of their all-time high set in 2011. The company is currently experiencing explosive growth, and I think this quarter is going to be above expectations. I wouldn't want to go into their earnings short, because if they do beat, the shorts will be sent scrambling.
In the first three quarters of this year, Molycorp's year over year revenues increased in the thousands of percent. Yes, I said thousands of percent. Granted, they were very small comparison numbers, but you can't ignore the growth. This quarter, Molycorp is only expected to see revenues rise by 500%. Earnings per share are expected to rise to a profit of 47 cents from last year's 6 cent loss. However, analysts have come down on their estimates, as earnings estimates before the last quarter were 63 cents for this quarter. I think expectations have been lowered so much (which is why the stock keeps coming down), that there is plenty of room for them to beat. I listed the stock as one of my top growth names for 2012, and I think the name has recently bottomed. I might not personally be long this name through earnings, but I would be even more scared of being short through them.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.