Alcatel-Lucent's (ALU) earnings will be released on Friday, February 10. For the past few weeks the stock's volatility has proven rewarding for speculators that have paid close attention to the pre-earnings news cycle. Both negative and positive news can impact a stock's price, especially when the stock carries a high beta such as ALU's 2.53. Add to the mix a highly volatile and an anxious market trading on low volume, and we have the perfect storm for making money.
Although one might question the timing of what might be viewed as negative articles that always seem to surface around earnings season, investors must nevertheless investigate the information thoroughly in order to determine the validity and potential impact it might have on the stock's price. For example, a recent article presented by one business writer asks the question "is Alcatel-Lucent hiding weakness"?
After carefully examining this information, I conclude that the answer to the writer's question is no, Alcatel-Lucent is not hiding weakness by carrying 27% goodwill and intangibles on its books. Click here to view a couple of charts comparing ALU to its peer group. Looking into this further, we find that Alcatel-Lucent's Goodwill and Intangibles are related to restructuring in 2007 and later aquisitions such as Velocix and OpenPlug, and the balance being related to their extremely valuable portfolio of 2216 patents at last count.
I recall ten years ago reading that Lucent had fiber optics in its portfolio capable of carrying thousands of times the capacity that was needed at the time. In other words, Lucent's scientists are working generations ahead of others when it comes to the R & D they are conducting. When this R & D results in new patents, it is reflected in the goodwill on the balance sheet. In this case, Lucent sold off the lucrative fiber optics business to raise cash just when analysts and observers were writing off the company back in 2001. Since then Lucent has been written off dozens of times and yet it still survives.
Other investors have apparently drawn the same conclusion I did on the recent question about ALU's goodwill as this news did not seem to impact the stock in a negative fashion.
Alcatel-Lucent continues to make astute speculators trading profits. Those that bought a $1.74 on Wednesday are up 12% and those that bought at $1.56 on Jan. 6th, are up a 25% as of Friday, Jan. 3rd. Buying and selling Lucent on dips seems to be working well. On Jan. 23rd, ALU hit $2.01. Those that got in a $1.56 and sold at $2.01 garnered a hefty 29% return. Buying back in at $1.74 -- you get the picture. If Lucent does not announce an impending bankruptcy next Friday, then speculators should continue to rake in the bucks.
There are a couple of different ways to play the upcoming earnings report. Sell a day prior to the report if you are in the money and hold back the shares that represent your profit from past gains. Often, shares rise in anticipation of earnings until about midday of the afternoon prior to an earnings report at which time they pull back. If ALU goes up on the report, you are still rewarded with the shares you continue to hold. If it goes down, watch carefully and pick up more shares when it bottoms again. And as noted above, speculators have also been making money on ALU after peripheral companies report dismal earnings as they know this will knock Lucent's stock down with it. A couple of days later they cash out and do it again. ALU has been above its 50 day simple moving average for the past two week now. The trend for next week is up unless bad news out of Europe sinks the whole ship.
Let me make this clear; this is called speculation. But for many traders, they are now playing on the house's dime, having recouped their initial speculation, so it is all fun from their perspective. I happen to believe in Alcatel's turnaround story, but the recent volatility sure provides some fun while waiting....and some weekend entertainment money.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ALU over the next 72 hours.
