Prepare Your Portfolio For Stocks That Drop On Earnings

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Includes: CVX, INTC, MSFT, ORCL, TIF, XOM
by: Rougemont

Every quarter we see a number of companies miss earnings, and when earnings disappoint or guidance is weak, it often results in a dramatic drop for the stock. The combination of many companies starting to feel the impact of a slowing European economy, increased dollar strength, refining margin pressure in the energy sector, and the PC supply chain disruption from Thai flooding could make this earnings season very risky for investors.

When companies post weak results or guidance it can lead to a buying opportunity if stocks drop too far due to investors overreacting to what might be a short-term or one time earnings miss. It makes sense for investors to be prepared for an earnings season that could be full of buying opportunities. For example, on January 10, Tiffany & Company (NYSE:TIF) announced it was lowering earnings estimates due to weaker than expected holiday sales. Investors hit the sell button and the stock dropped $7 per share or about 10.5% in a single day.

Since a number of challenges converged in the last quarter, many companies are likely to miss earnings or give weak guidance. Many companies that have exposure to Europe are seeing lower sales due to the ongoing debt crisis. In a recent article on Barrons.com, analysts are even predicting that some major oil companies could miss earnings.

The companies below are just examples of the types of companies that are highly vulnerable to an earnings miss. If these major companies are vulnerable to an earnings miss, then just about every company could be at risk. Forward thinking investors should review their portfolios for stocks like these and prepare a plan of action, so that they are ready to take advantage of stocks that drop to oversold levels on a bad earnings report or weak guidance. Stocks often rebound after a one- or two day sell-off and investors who are prepared to take advantage of these dips can end the earnings season with gains.

Exxon Mobil, Inc. (NYSE:XOM) shares trade for $85.50. Texas-based Exxon is a major integrated oil and gas company, and is one of the most valuable companies in the world. Exxon is a core holding for many energy stock investors. The earnings per share estimate is $8.56 for 2011 and $8.35 for 2012. These shares have traded in a range between $67.03 to $88.23 in the last 52 weeks. The 50-day moving average is $80.31 and the 200-day moving average is $78.76. XOM pays a dividend of $1.88 per share which is equivalent to a 2.2% yield. At least one analyst is concerned that the quality of the earnings at Exxon will not be viewed well by investors as some of it could be driven by one-time asset sales rather than ongoing operations. Exxon shares are currently at the very high-end of the recent trading range, so a poorly viewed earnings report could trigger a drop in the stock price and create a buying opportunity for long-term investors.

Chevron Corporation (NYSE:CVX) shares trade for $109.49. Chevron is a major integrated oil and gas company, and is based in California. The earnings per share estimate is $8.57 for 2011 and $9.03 for 2012. These shares have traded in a range between $86.68 to $110.99 in the last 52 weeks. The 50-day moving average is $103.49 and the 200-day moving average is $100.74. Chevron pays a dividend of $3.24 per share which is equivalent to a 3% yield. This company has refining operations, and with major refiners like Tesoro (NYSE:TSO) warning that refining margins are weak, this is one area that could impact the earnings result at Chevron. The other issue is that the stock is trading near 52 week highs, so expectations and the stock price might be too high and easily susceptible to a drop when earnings are released.

Intel Corporation (NASDAQ:INTC) shares are trading at $25.47. Intel is a maker of semiconductors for computers, smart phones, and other electronic devices. The 50-day moving average is about $24.28 and the 200-day moving average is about $22.14. These shares have traded in a 52 week range between $19.16 and $25.78. Earnings estimates are about $2.37 for 2011 and $2.38 for 2012. Intel pays a dividend of 84 cents per share, which provides a yield of about 3.3%. Intel seems exposed to a number of issues that could result in an earnings miss and possibly weak guidance going forward. A PC supply chain disruption due to floods in Thailand, weak demand from Europe, and rising tablet sales all could contribute to a very challenging quarter for Intel. Furthermore, the stock is trading at the high-end of the recent trading range and this could be setting the stock up for a sell-off when earnings are reported. A drop below $24 would be a solid buying opportunity for longer term investors thanks to Intel's strong balance sheet and solid dividend yield.

Oracle Corp. (NASDAQ:ORCL) shares are trading at $27.03. Oracle provides business software solutions, and is based in California. The 50-day moving average is $29.94 and the 200-day moving average is $30.89. These shares have traded in a 52 week range between $24.72 and $36.50. Earnings estimates for ORCL are at $2.40 per share in 2011 and $2.66 for 2012. Oracle pays a dividend of 24 cents per share, which provides a yield of about .9%. Oracle recently reported earnings that disappointed many investors and the stock dropped. New subscriber growth was much weaker than expected and this weakness seems likely to last for more than just one quarter. European sales are likely to weaken further as major countries like Italy see economic conditions deteriorate. This stock has already dropped over the earnings issues, but have seen a slight rebound. The stock could re-test recent lows if other major tech stocks report weak earnings. Oracle is a must-own tech stock for many investors and it has excellent management, so I would buy on dips.

Microsoft Corporation (NASDAQ:MSFT) shares are trading at $27.74. This company offers many popular software programs, such as Office, the Xbox game console, Kinect, the Windows operating system, and more. Earnings estimates are about $2.55 for 2011 and $2.76 for 2012. This gives MSFT shares a PE ratio of only about 9 times earnings. The 50-day moving average is $25.97 and the 200-day moving average is $25.55. The shares have traded in a range between $23.65 to $29.46 in the past 52 weeks. The dividend is 80 cents per share which yields about 2.8%. Microsoft shares have been trending higher in the past couple of weeks and could be an easy target for a drop on earnings. Europe's weak economy could hit Microsoft in a number of areas, as could the PC supply disruption from Thai flooding. With major tech companies like Oracle and Intel (INTC) reporting recent weakness, it's reasonable to think Microsoft could do the same. This company is a low-risk way to play technology so any dips below $25 should be a welcome buying opportunity.

The data is sourced from Yahoo Finance. The information and data is believed to be accurate, but no guarantees or representations are made. Rougemont is not a registered investment advisor and does not provide specific investment advice. The information contained herein is for informational purposes only.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.