It's safe to say that we are heading into our week 5 with significant momentum. The performance of each week has been solid, with the exception of week one, and the number of investors who are playing along is becoming increasingly large. And more importantly we are proving to all the naysayers who believe this strategy can't work consistently to be wrong. As usual, before we begin and choose the stocks to buy before earnings, for this upcoming week, let's take a look at week four's results.
|Company||Ticker||$ Spent||Buy Price||Sell Price||$ Return||Gain/Loss|
Although week four returned a 9% gain, I am a bit disappointed by the results of Sprint and SIRI. I was very bullish of both companies heading into earnings, and both companies fell below my expectations. As I noted in week four's piece, I had purchased Sprint in week three, therefore my return from Sprint varies from other investors. However, if you were patient and effectively utilized the "rules" of playing earnings then you should have returned a slight gain or closed the position as even. Sprint was my largest return because I was able to sell the stock in premarket trading before the market opened. However, I sold most of my positions the day following each company's earnings once the market opened, because I've noticed that most stocks that pop after earnings are trading at their highest point within 20 minutes of the trading day. This may be important to remember for future plays. I've also received numerous emails asking about premarket trading and how a stock can be sold or purchased during this period of trading. Some online brokerage firms offer extra hours' trading; I use tradeking.com because it offers very reasonable prices and it's very good about executing orders quickly.
Now that we've looked at week four, and discussed extra hours trading, it's time to discuss my week five plays. The first step is to look at the most likely direction of the market. And although the Dow Jones has returned 4% over the last month, I believe the market will trade slightly higher or flat in week five because of encouraging U.S. data along with reports of progress in Europe. But because of the large gains we've already returned I am going to play this week much safer, with stocks that consistently trade higher after earnings, and use most of my large plays on stocks that I consider to be safe.
Deere & Company (DE) will announce earnings on Wednesday and will be my largest play of the week. In my opinion, expectations are considerably low; the company has beaten expectations during each of its last 3 quarters by a considerable margin. It has posted average revenue growth of 26.3% year-over-year during its last 4 quarters and has returned an even larger level of growth in net income throughout 2011. Yet despite its recent history of substantial year-over-year growth, analysts are expecting revenue of $6.49 billion, 17.7% year-over-year gain, and an EPS of $1.23, a 2.5% gain compared to last year. The revenue guidance seems appropriate but the bottom line expectations are considerably modest. The company's growth has been a result of a strong forestry segment and record farm cash receipts in 2011. The company's also expanded its global construction segment and is building new plants in emerging markets. DE tends to trade and perform similar to Caterpillar (CAT), and since we all know how CAT performed, I believe that DE is a near guaranteed beat, therefore I am buying $6,000 worth of shares (half were bought on Friday).
V.F. Corporation (VFC) has been one of the more stable companies over the last two years, therefore I am buying $4,000 of VFC as a security play to protect gains. This earnings season has returned nearly 25%, which is more than most portfolio managers will return in two years, and because of the gains being so considerable you must protect your return. VFC won't return 20% but it consistently beats expectations, each of the last 8 quarters, and is trading with momentum that could return a decent gain after the company announces earnings. The company will announce on Thursday and is expected to post an EPS of $2.31, which is a large gain year-over-year. I feel confident that VFC will meet expectations as a result of strong sales and an aggressive growth plan that should allow for continued growth.
Weight Watchers (WTW) is a stock that some believe is a bit risky. However, the stock has met or beaten expectations each of the last three quarters and it continues to stand alone in a competitive industry. The company is expected to post earnings of $0.86, which I believe is somewhat modest compared to the company's expansion into new ventures. In the last 6 months the company has effectively targeted men by using Charles Barkley and has moved its business into the ever growing economy of China. WTW continues to grow larger and improve its margins, and I believe it was cheated last quarter when it announced solid earnings but traded lower during the sell-off within the market. I am expecting a large return from WTW and I am buying $4,000 worth of shares.
Fossil (FOSL) will announce earnings on Tuesday and is expected to post an EPS of $1.76. Fossil has beat expectations each quarter for the last two years. However, the stock's trend has been unpredictable. Much like WTW, Fossil exceeded expectations during its most recent quarter but then traded lower. The stock traded lower as a result of heavy selling pressure within the market, and because it trades 71% more volatile than the market, it tends to trade in the direction of the market. The markets have been more stable over the last couple months, and FOSL has returned nearly 30% YTD. I believe that FOSL will, once again, exceed expectations and because of the stability in the market it will trade higher on fundamentals. Therefore, I am buying $4,000 worth of FOSL shares before it announces earnings on Tuesday.
EOG Resources (EOG) is one of my top three favorite stocks in the energy sector. There are very few companies within the market that are growing with the same intensity; and I expect its growth to remain aggressive. The company will announce earnings on Friday and will attempt to beat its expectations of $0.88 per share for the fourth quarter in a row. EOG has posted higher revenue and income during each of its last five quarters, and has improved its margins each quarter during the same period. The company is growing very fast and has significant upside potential as an investment. However, I am only purchasing $2,700 of shares in EOG. I believe that EOG is a great company but there have been several large companies within this industry to miss expectations. And since one of the first lessons we talked about was how to identify common trends of performance within an industry, I will invest in EOG with caution, while still expecting good results.
My smallest position of the week will be in shares of Zillow (Z), only $2,500 worth of shares. So far, Zillow has been a success story in a class of underperforming internet company IPOs of 2011. The stock hasn't performed particularly well since its IPO, but fundamentally its earnings have been a pleasant surprise that return gains. Zillow has posted two surprise quarters since becoming public and both quarters resulted in large gains following its report. The company's expected to announce an EPS of $0.01, which I believe is attainable. During its last quarter it grew revenue by 131% and improved its margins year-over-year. The growth is a result of the struggling real-estate market, as agents are more willing to spend money on marketing.. I don't necessarily think it's a good long-term investment but it should be a good play. In addition, the real estate market has shown very slight improvements, therefore it will be interesting to see if slight improvements will affect the company's earnings. Much as with EOG, I am hesitant to purchase a large number of shares, but I do want to own shares because I believe it's likely that Zillow trades higher. Therefore, I am buying $2,500 worth of shares, and I look for revenue growth to continue as more agents decide to use Zillow's services to capitalize on opportunity.