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Brian Nichols, NicholsToday (503 clicks)
Value, research analyst, biotech, author
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For the last three weeks I've been writing a series of articles that focus on buying stocks prior to earnings. It's a strategy that I've played for quite sometime, therefore I decided to write a series of articles that take investors week-by-week through my actual purchases. Every quarter I use a small percentage of my portfolio for playing earnings, and in this quarter I used $20,000 as the starting amount. After the first week, we were down because of the Google (GOOG) miss. But in week two we returned approximately 11% and entered week three with a balance of $21,600. But now that shares for week three have been sold it's time to look at week four, which has been my most anticipated week for the season, and I expect large returns with several undervalued companies scheduled to announce earnings.

Upon the request of several readers I wrote an article entitled "The Art Of Successfully Playing Earnings." The goal was to discuss and explain the most efficient ways to play earnings along with strategies to return larger gains. One topic that I discussed within the article was the idea of buying low and selling high. I admitted that unfortunately there is no guaranteed way to ensure that you are buying and selling at the best possible prices. However, I did provide some tips and points-to-remember when buying stocks before earnings, which will ensure that you are giving yourself the best opportunity to buy, and sell, at good prices. Week three was perhaps my best week at purchasing and selling stocks. The tips that I laid out in "The Art Of Successfully Playing Earnings" worked to perfection, and I was able to buy and sell at very reasonable prices, which increased my overall return. In my opinion, week three was a success and I have received numerous emails from investors who have chosen to invest in this strategy that each returned gains.

Below is the chart for the week three results. It shows the buy, sell, and total return of each stock that was played in week three. First, I will discuss and review week three and then we will head into week four, which I've already stated is my favorite week of the entire earnings season.

Week 3

Company Ticker $ Spent Buy Price Sell Price $ Return Gain/Loss
Baidu (BIDU) $2,932 $127.50 $129.50 $2,978 $46
Amazon (AMZN) $2,865 $191.00 $178.24 $2,673 ($192)
Dow Chemical (DOW) $3,601 $33.35 $33.80 $3,650 $49
Green Mountain Coffee (GMCR) $3,021 $53.01 $65.50 $3,733 $712
Mastercard (MA) $4,905 $350.40 $380.00 $5,320 $415
Tractor Supply Co (TSCO) $3,969 $81.03 $80.71 $3,954 ($15)
$21,293 $22,308 $1015

The total return over the last two weeks has been 16%, which includes a 5% return in week three. We began week three with approximately $21,592 after returning $2,101 in week two. However, I only used $21,293 which means there is a $300 bank or a total balance of $22,608 to be used in week four. Before we begin to discuss my choices for week four, let's take a look at my notes for the played stocks in week three.

  • BIDU -- As I mentioned in part 3 of this series, I actually purchased BIDU on Friday Jan. 27 which allowed me to purchase the stock at a cheap price. The company did not announce earnings, therefore I tried to sell the stock as close to my purchase point as possible so it could be used as more of a bank than a returned gain from an earnings week.
  • AMZN -- Because of Amazon's high valuation there were several investors who questioned this decision. Looking back, it probably wasn't the best choice but at the time I believed that strong online consumerism would lead to higher sales during the holiday season, however I was wrong. As I said in the previous article, buy when the market is trading lower and try to sell when it trades higher. I stuck to this plan and purchased AMZN on Monday, and thanks to my limit orders I was able to sell it at a decent price for a limited loss.
  • DOW -- I was fairly confident regarding the performance of DOW but the company's unexpected loss wasn't welcomed in the market. Much like AMZN, I purchased the stock on Monday when the market was trading lower, which then allowed me to capitalize on the uptrend leading till earnings which actually returned a slight gain.
  • GMCR -- The company blew out expectations and traded higher. I purchased the stock on Tuesday with a limit order of $53. I then sold half my shares when the stock opened for trading at $65.05 and the other half at $65.95 towards the end of the trading day on Thursday.
  • MA -- Mastercard has been one of my favorite stocks to play following earnings. It either reacts with slight loss or large gains, and during this particular quarter the stock posted massive gains. I expected the stock to trade higher as it approached earnings, therefore I purchased it on Monday when the market was trading lower.
  • TSCO -- I honestly believed that TSCO was a sure hit. However, it failed to exceed expectations and traded lower. I purchased the stock on Tuesday as it was trading lower, then sold soon after it announced earnings when it made a slight pop higher, only to turn lower. TSCO serves as a constant reminder that you must be prepared for surprises during earnings season.


Alright, now it's time to start on week four, and to hopefully continue the trend of large gains. I am quite optimistic with the companies that are reporting earnings this week. I feel that there are a large number of undervalued companies, with significant investor optimism, that are reporting earnings in week four. We will start with $22,608 which is the collective gains from the last three weeks. I will say in advance that some may feel that the risk is too high with my following picks. However, I divide the money into stocks based on my confidence level with each company, and this week has several companies that I am confident will trade higher by the end of the week.

Visa (V) will announce earnings on Wednesday and is expected to report earnings of $1.45 per share. The company's met or exceeded expectations for the last three years, and usually trades higher following earnings. My only concern is that its margin of surprise, compared to expectations, has declined over the last few quarters, which means that analysts are better predicting its growth. Yet, the company is still growing at an impressive rate and is trading at all-time highs. I believe there is enough optimism surrounding its stock to push shares even higher following earnings, which is why I am investing $5,000 into shares of V. Investors are already expecting strong results following the earnings of Mastercard, therefore I suggest playing this stock a couple days before earnings to capitalize on the gains before the announcement.

Ralph Lauren (RL) will announce earnings on Wednesday and is expected to post earnings of $1.67. The company has seen incredible growth over the last year, with a growing product line throughout the globe. The company beat expectations by $0.26 with $2.46 during its last quarter but, like many stocks, traded lower because of investor's obsession with Italian debt. I believe the stock is extremely cheap and that its most recent quarterly results were ignored because of panic within the market. Therefore, I feel that its well positioned to trade much higher following earnings on Wednesday, which is why I am buying $4,500 worth of shares prior to earnings.

Sirius XM (SIRI) is a company with earnings that I've been anticipating ever since it traded lower after its last two quarterly reports. Much like Ralph Lauren, the company easily exceeded expectations, yet traded lower with the market, back when European turmoil enticed the fear of investors. The company is expected to post earnings of $0.01 when it reports on Thursday, which is a near guarantee beat.

During both of the company's most recent quarters it was expected to post an EPS of $0.01, and it exceeded expectations with $0.02 and $0.03. But now that the trend of the market has changed and SIRI is trading higher I am confident that this quarterly report will push the stock to new 52 week highs, into territory that has not been seen in quite sometime. The company has improved its margins, is directly affected by the high sales of the auto industry, and is raising prices which could mean higher guidance. Overall, I think it's another can't miss stock which is why I am buying $5,000 worth of shares in SIRI.

I think SIRI, RL, and V are all very exciting plays. But the stock that I am most excited about is Sprint Nextel (S). Most will be very weary of this play, which is exactly why it makes such a great buy. The company is expected to post a loss of $0.37 because of high costs associated with the iPhone. However, I expect the company to surprise even the most bullish analysts and that its new subscribers, total revenue, and improved efficiency will be enough to return large gains following earnings.

I think the $0.37 loss is going to be very easy for this company to exceed; it posted a loss of $0.10 last quarter which beat analysts $0.30 expected loss, which means the company is cutting back on costs. I think the iPhone is a game changer. And although I don't expect a profitable quarter I do believe that it will exceed 270,000 net subscribers, which will be encouraging compared to its loss of 44,000 subscribers in Q3. This will lead to higher guidance, possibly net income, because although it has cost the company to sell the iPhone the expenses are upfront and everything else is a profit, in later quarters. And if the company can add anywhere near 300,000 new subscribers, which is expected, then I think the company will release guidance, that along with closer margins and higher revenue, will be enough to return high gains in shares of Sprint. Therefore, I am investing $4,300 in shares of the undervalued Sprint before it reports on Wednesday.

Every week I have one, or two, stocks that people believe are very risky. This week I have already chosen Sprint, but I am also buying $2,500 worth of shares in Level 3 Communications (LVLT). Obviously, with $2,500 I am not quite as confident, but I believe that expectations are low enough to where the company can exceed its expectations.

Level 3 will announce earnings on Wednesday and is expected to lose $1.06. The company has posted revenue gains during each of its last three quarters, however the bottom line has been less than exciting. I've never been a big supporter of Level 3, or its Global Crossing acquisition, but I can't deny the fact that LVLT now has the most fiber of any other communications company with more than 175,000 miles across three continents, which drastically increases its position in a very competitive industry. However, the stock has lost a lot of its steam, as of late, and is trading at just 50% of its 52 week high. I now think the company is fairly priced, and I am excited to hear the company's guidance now that the Global Crossing acquisition is complete.

The stock has posted a YTD gain of 20% and I think investor optimism is starting to build. If the company can prove that it's on the right path and just meet expectations then I expect large gains. It's important to remember that Level 3 should've been bankrupt several years ago, but award winning accounting and efficiency has led many to believe in its potential to grow. Therefore I wouldn't be surprised to see its finance team crunch the numbers in a way to where it exceeds estimates and trades higher with expectations being so low.

Some may look at week four and think that it's a recipe for disaster, but I think it has the potential for the best gains yet. Visa and Ralph Lauren are both fast growing efficient companies with a significant amount of investor optimism. SIRI is trading with optimism and has the growth to back its trend, and in my opinion, the iPhone is a game changer and investors will soon realize the number of customers who are switching to Sprint. The only wildcard is Level 3, but because of its valuation and its potential to grow I believe its worth a very small purchase as it could surprise Wall Street. The last two weeks have been very nice, with a return of 16% compared to the market's 1% gain, and I expect this trend to continue throughout the second half of this series.

Source: Stocks Worth Buying Before Earnings, Week 4: Feb. 6 -10

Additional disclosure: All information regarding earnings results, earnings expectations, and history of performance was obtained from CNBC.