Stocks Worth Buying Before Earnings: Week 6

by: Brian Nichols

Over the last five weeks I've written a weekly piece in which I purchase and sell stocks prior to earnings. After week one my balance was $19,500 but now after the most recent week my balance is $23,993, for a 24% overall gain. The series has had its ups and downs but overall the returns have been consistent and have significantly outperformed the S&P 500.

Last week was suppose to be my final week of this quarter to purchase stocks prior to earnings. However, this upcoming week is filled with opportunity that is too good to pass up. There are also a number of companies announcing earnings the week of March 5 that I find attractive, therefore I may continue the series for one additional week. Following the last piece, this series will restart in early April with the balance from my last week of this earnings season. But before we look ahead at this weeks picks let's take a look at how last week turned out.

Feb. 13-17 Results
Company Ticker Cost Buy Price Sell Price $ Return Gain/Loss
Dell Inc. (NASDAQ:DELL) $2,002 $18.20 $17.15 $1,886 ($116)
Hewlett-Packard (NYSE:HPQ) $3,480 $29.00 $27.19 $3,265 ($215)
Dollar Tree (NASDAQ:DLTR) $5,487 $88.50 $87.00 $5,394 ($193)
MGM Resorts (NYSE:MGM) $2,992 $14.25 $14.00 $2,940 ($52)
Target (NYSE:TGT) $4,998 $52.60 $55.30 $5,253 $256
SandRidge (NYSE:SD) $3,000 $8.10 $8.60 $3,182 $182
$21,958 $21,920 ($38)

Last week I decided to take some profits and withheld from using $2,075 making my total balance $23,995. My goal, for last week, was to diversify my buys into several industries hoping to capitalize with a balanced approach. However, it did not work out the way I expected: I simply placed too much faith into a struggling computer hardware industry and returned a weekly loss. In addition, I missed with the Dollar Tree for the first time in several years. Overall, last week was a disappointment, but when you are playing earnings you have to realize that some weeks are going to be good and others will be bad. With that being said it's time to move on and look at the picks for this upcoming week.

One good thing about buying stocks later in the earnings season is that you get to see how similar companies perform in a particular quarter. Throughout the earnings season my picks in energy have been hit or miss. Therefore, I will take this into consideration but am still buying shares in two energy companies for the upcoming week.

The first company is Kodiak Oil & Gas (NYSE:KOG) I feel fairly confident in KOG's likelihood to both exceed expectations and trade higher after earnings are announced. Fellow SA writer Michael Filloon, who covers the industry very well, recently wrote an article regarding the success of Bakken oil producers. I think that KOG will continue the trend of success for companies in this region and will trade higher after it announces earnings on Feb 28. But because of its valuation and the inconsistency of oil companies, following earnings, I will only buy $3,000 worth of shares.

HollyFrontier (NYSE:HFC) is the second energy company that I am buying before earnings. The company will announce on Feb 28 and is trading surprisingly lower prior to its announcement. The company has beat expectations each of the last three quarters and is trading at just 6.5x earnings. Therefore, I think it's trading at a price that presents little downside but substantial upside. As a result, I am buying $3,000 worth of shares, exactly the same as KOG.

Autozone (NYSE:AZO) will announce earnings on Tuesday and is expected to post an EPS of $4.04. I consider this stock to be a safe buy with upside potential. The company has met or exceeded expectations during each quarter of the last three years. And since the performance of similar companies can sometimes tell you what's ahead, I think AZO is poised to pop. Both O'Reilly (NASDAQ:ORLY) and Advance Auto Parts (NYSE:AAP) have already announced earnings and both exceeded expectations by a considerable margin. Autozone is the largest of the three companies and because of the strength in the auto industry I wouldn't be surprised if AZO exceeded expectations by a large margin. Therefore, I am buying $5,500 worth of shares, and I believe AZO presents little risk with a beta of just 0.36 with significant upside potential in a strong industry.

Jazz Pharmaceuticals (NASDAQ:JAZZ) will announce earnings on Monday after the market closes. Jazz is one of the fastest growing companies in biotech and has beat expectations during each of the last four quarters. I have no doubt that JAZZ will exceed expectations but I fear that its results may already be priced into the stock. JAZZ is trading at 52 week highs and has returned a 9% gain over the last three days as investors anxiously await another great quarter. The stock is fairly priced, trading at just 20.50x earnings therefore its performance will depend on the sales of its two fast growing drugs and the results from its takeover of Azur Pharma. Overall, its a stock that could very well trade higher by 20% if it exceeds by a large margin but it could also fall if it shows any weakness on its earnings report. Therefore, I bought $4,000 worth of shares on Friday at $50.50 and believe the risk is worth the reward.

One of my favorite companies in the entire market is Spectrum Pharmaceuticals (NASDAQ:SPPI) and it's priced considerably low compared to its growth. The stock has traded higher by 10% over the last three days, ever since the company's earnings date was announced. But it's still trading lower by 7% over the last month as investors took profits. I expect this stock to trade higher over the next few days leading up to its earnings announcement on March 1. The company is expected to announce earnings of $0.31 which I believe is a slam dunk. The company has two fast growing drugs and a solid pipeline to suggest future growth. SPPI is one of my largest holdings, 3,150 shares, but on Friday I bought another $8,000 worth of shares prior to earnings. The future for this company is very bright, and considering its last quarter when it beat expectations by 209%, I think it will easily exceed $0.31 per share when it announces on Thursday.

Disclosure: I am long JAZZ, SPPI, HFC, AZO, KOG, DLTR.