It's safe to say that last week did not turn out the way I expected; with several stocks trading lower after beating expectations. One reason being a common trend that has occurred throughout this earnings season. During the last few weeks a large portion of stocks have run-up prior to earnings and then pull back after earnings are announced. Last week Deere & Company (NYSE:DE), EOG Resources (NYSE:EOG), and Zillow (NASDAQ:Z) all exceeded expectations yet traded lower after posting initial gains. It will be important to remember this trend and take advantage of a good price whenever it presents itself, then capitalize on initial gains. These changes will be made during the final two weeks of this earnings season so that larger gains can be returned.
|Company||Ticker||$ Spent||Buy Price||Sell Price||$ Return||Gain/Loss|
|Deere & Co.||$5,980||$86.75||$85.98||$5,934||($46)|
Last week I began with $23,214 which was my balance from the gains accumulated over the last four weeks. I used $23,153 and finished the week with a $61 bank, therefore I have $24,092 to play earnings after a $878 return. Last week was a very frustrating week, but it continued to show a trend that has taken place in all of the previous four weeks; an uptrend prior to earnings. During this upcoming week I plan to buy early when the market trades low and be more disciplined in selling stocks once earnings are announced. It's impossible to successfully profit from every play which is why I choose so many stocks every week. The idea is to return more than what you lose which is what I have consistently accomplished throughout this earnings season.
In the past, I have always sold half of my shares immediately after earnings if the stock trades higher. It's impossible to know for sure which direction a stock will trend following the initial pop, therefore I have always sold half to ensure a solid return. Sometimes a stock will trade like FOSL and trade higher throughout the day, but then sometimes it trades like Zillow with initial gains but never recovers from profit taking.
Last week the majority of my gains were a result of the stock trading higher before earnings, with four out of six trading lower after profit taking occurred. For this upcoming week it will be important to take initial profits following earnings -- because although I returned gains -- my gains could have doubled if I had sold my shares like I had in previous weeks.
Feb. 21-24 Plays
On Tuesday after the market closes all eyes will be on Dell (NASDAQ:DELL) as investors will be anxious to see whether or not the company is recovering from its weak consumer demand and supply chain issues. The expectations for the company are very low, at just $0.51 a share compared to $0.53 last year. However, analysts do expect a slight increase in revenue compared to 2011 of $15.94 billion. The stock has performed very well in 2012, gaining 24%, and I believe that expectations are low enough that the company will exceed and trade higher. There has been an increase in demand from corporations for PC's and servers and recent data suggests that IT spending gained momentum to finish 2011 which could lead to higher guidance. Because of the company's low valuation I believe that DELL is a stock worth buying, but only with a small position. Therefore I am buying $2,000 worth of shares and look for a solid pop if the company can exceed expectations, or show signs that its business is improving.
Along with DELL I am buying Hewlett-Packard (NYSE:HPQ) for the exact same reasons. The company has experienced the same drop in consumer demand but should benefit from PC and server sales to corporations. The problems surrounding this company over the last year have been significant. But I believe that expectations are so low and its stock is priced so cheap that any level of optimism could result in massive gains. The company's expected to post earnings of $0.87 on revenue of $30.77 billion which is much lower than last year when the company posted revenue of $32.3 billion and an EPS of $1.36. I am much more confident about this play than DELL, therefore I am buying $3,500 worth of shares, as I believe it presents very little downside but massive upside.
Throughout this series I have returned very significant gains. The market is trading at multi-year highs and the problems in Greece appear close to a resolution. Yet despite the possibility of even more gains in the near future you must protect your gains. Therefore, I suggest buying Dollar Tree (NASDAQ:DLTR) which I consider to be one of the best long-term investments in the market. I have owned DLTR for several years, which means I am a little biased. The company has exceeded expectations for the last two years and continues to trade higher. DLTR does particularly well during quarters of major holidays, which was evident from its Halloween sales during Q3. In Q4 the company will have massive sales from both Thanksgiving and Christmas as more consumers try to cut costs by buying supplies at the Dollar Tree. The company's expected to announce earnings of $1.58 and I believe the company will have no problem exceeding expectations. I am buying $5,500 of additional shares in DLTR and look for this company, which opens a new store every two days, to be a safe play that returns a decent gain.
One of the more questionable stocks in the market is Pandora (NYSE:P). Much like Sirius XM (NASDAQ:SIRI) investors have strong opinions regarding its long-term outlook. And although I am still undecided on whether I believe P can continue growing for the next 10 years I do believe it's a great play right now. If you would have asked me a couple weeks ago I wouldn't have felt the same. But because of SIRI's miss I believe that Pandora may be stealing a share of the auto industry's high sales. In Q4 both Ford (NYSE:F) and General Motors (NYSE:GM) posted incredible sales and I expected SIRI to capitalize on the high sales but didn't. Pandora is now being showcased in several new models and I believe that with low expectations the company could once again surprise investors. The company beat expectations in its last two quarters by posting earnings of $0.02. And since analysts expect the company to post a loss of $0.02 I believe it has the potential to return a very large gain following its earnings report. The only problem is that Pandora has returned gains of nearly 30% YTD, therefore I will play it safe and buy $2,500 worth of shares prior to the company's report on Wednesday.
One of the biggest YTD movers has been MGM Resorts (NYSE:MGM). The stock has returned over 40% YTD as a result of encouraging economic data and an increase in volume at casinos. The company will announce earnings on Wednesday and is expected to post a loss of $0.19, which is an improvement year-over-year. MGM has beat expectations each of the last four quarters and because of the improvements in the economy over the last few months I believe that MGM will once again beat expectations and possibly increase guidance. Therefore I am buying $3,000 worth of shares in MGM prior to it announcing earnings.
During the upcoming week we will get earnings from several of the largest retail companies in the market.
Retail companies such as Walmart (NYSE:WMT), J.C. Penny (NYSE:JCP), and Kohls (NYSE:KSS) will announce quarterly results. But of the large retail companies that are announcing earnings I believe that Target (NYSE:TGT) is the best play. The company is expected to post an EPS of $1.40, a $0.02 gain year-over-year. Unlike others, TGT has traded fairly even YTD and has massively underperformed. Even WMT which has traded in a consistent range for 10 years has posted large gains, and JCP has been one of the best performing in the industry despite the immediate problems that the company faces. Target is trading at just 12x earnings and 0.50x price/sales. Target is yet to trade higher and is well-positioned for large gains, it's trading at the mid point of its year range, and it has several encouraging developments that could spark new growth. The company's developed several partnerships over the last year which include Starbucks (NASDAQ:SBUX) in Canadian stores and most recently Apple (NASDAQ:AAPL). I think the future is very bright for this company and that its stock has a significant amount of space to trade higher. Therefore, I am buying $5,000 worth of shares prior to earnings on Thursday.
Another sector with several companies announcing earnings is energy, and I believe that SandRidge Energy (NYSE:SD) is best positioned for gains. SandRidge hasn't been the most consistent stock over the last year and its earnings have been a bit erratic. The primary reason for it trading 110% more volatile than the market is the questions surrounding its funding and the price of crude and natural gas. SD has failed to trade higher in 2012 despite such large movement in the price of crude, which is somewhat surprising. The company will announce earnings on Friday and is expected to post a loss of $0.02. I believe it will exceed expectations with the price of commodities recovering towards the end of 2011. And I believe the company will increase its guidance with commodities stabilizing at high prices. Another important factor to its performance will be the interest that it sold in Oklahoma for potentially $1 billion. This could eliminate the funding issues in 2012 and allow for SD to trade much higher. Therefore I will buy $3,000 worth of shares prior to earnings and expect strong gains in the stock which has seen little movement.
The last few weeks I have played a relatively small number of stocks. This week I am playing seven different stocks, and feel as though it's the perfect balance of risk and stability to return large gains. My large positions are stocks that will most likely experience little movement regardless of earnings. But the small positions each have low expectations and a significant amount of pessimism surrounding the likelihood for it to beat expectations. There are several important points to remember when playing earnings; but for this week my primary goal is to buy when the market is trading lower, ride the stocks higher until earnings, and then take either half or all of my profits if the stock pops. However, if the stock were to fall then it's important to be patient because 90% of the time the market will overreact to earnings either positively or negatively.
Additional disclosure: The information within this piece is for educational purposes only. Any and all investment decisions should be discussed with your financial advisor.