2 Stocks Likely To Present Significant Gains Following Earnings

Includes: PEIX, ZAGG
by: Brian Nichols

For the last six weeks I have written a weekly piece that suggests stocks worth buying prior to earnings. The series is progressive, meaning that my gains from the previous week reflect on the following week's starting balance. And over the last five weeks the plays have resulted in large gains of more than 25%. But ever-so-often I will write a weekly piece and then notice that I forgot to add, or mention, a company that I like. As a result, I will purchase a stock prior to earnings that is not listed on my weekly article of stocks worth buying prior to earnings. This week I am buying two stocks prior to earnings that I believe have 20% upside following earnings.

For week six I am purchasing two biotechnology companies that are among the fastest growing companies in the market along with two energy plays and a specialty retail company. However, I forgot to mention two of my favorites which are perceived as somewhat risky plays: Pacific Ethanol (NASDAQ:PEIX) and Zagg (NASDAQ:ZAGG). I have been very bullish on both companies and feel that both stocks are presenting the likelihood for significant gains following earnings.

Pacific Ethanol

Pacific Ethanol is a small, $100 million, under-the-radar company that should be on the watch list of all investors. I believe this is a much improved company presenting significant upside potential, following its fallout in 2009. Just 5 years ago, PEIX was an $8 billion company, but after a series of events and costly decisions the stock has lost 99% of its value.

Since 2006 the stock had been on a constant downtrend but has returned a 380% gain since October. The reason for its large turnaround is the results from its record earnings report last quarter, which include an all-time best in total gallons sold. The company is the leading marketer and producer of low carbon renewable fuels in the Western United States. But after a recent management agreement, with Zeachem, some investors believe the company is well positioned to grow into other regions besides the Western U.S.

During Pacific Ethanol's last quarter there were several highlights besides an all-time best in gallons sold. It reflected a ninth consecutive quarter of growth in gallons sold which helped the company post another all-time best in net sales of $271.6 million, a 490% year-over-year gain. The company's 122.6 million gallons sold was a 71% gain year-over-year, and a 22% increase over its previous quarter. PEIX improved gross profit by 105% year-over-year and reported net income of $4.35 million compared to a loss of $12.12 million in the year prior.

Based on the fundamental improvements during the company's most recent quarter it's obvious to see why investors are so optimistic of the company's future. The excitement surrounding this company is evident, which can be seen by its 27% gain on Friday in preparation of earnings on Monday, after the market closes. I am quite optimistic that PEIX will report yet another quarter of growth and will give guidance to suggest further growth into the future. I am a long-term investor of PEIX, I bought shares on November 29, 2011, because I believe that its earnings will only improve and it will return to its past days of glory.

PEIX is more than just an earnings play, it's a long-term investment. In my opinion, we will see an increase in demand for ethanol over the next several years, and with PEIX controlling so much of the industry, I believe it's poised for future growth. The United States has a large quantity of ethanol and as gas prices continue to increase I believe we will see a push for a cleaner fuel. Ethanol makes gasoline cheaper, air cleaner, and we can back off out dependence on foreign oil. The issues surrounding our dependency on foreign oil and high gas prices will be a major topic in the upcoming presidential race. As a result, I expect more demand in ethanol, and with PEIX accounting for $800 million in total sales it's well positioned to handle the demand and grow with a balance sheet that keeps improving.


Another play that I like for the upcoming week is Zagg prior to earnings. The company will also announce earnings on Monday in after-hours. The company is expected to post earnings of $0.20 which would be a significant gain year-over-year.

There are several reasons to be optimistic that ZAGG will exceed expectations when it announces earnings. It has significantly increased the number of products that if offers along with adding these products to new vendors. But primarily it's because of record sales in mobile phones, more specifically Apple's (NASDAQ:AAPL) iPhone.

In case you don't know, Zagg sells the protective shields and cases for mobile phones and tablets. The strong sells from the iPhone lead me to believe that ZAGG will once again report record sales, and because of its large orders through its website I think its margins will be much better than expected.

Last quarter Apple sold 37 million iPhones, and let's face it, when people by a new phone they want it to be unique. The fact is that Apple's iPhone is the best device is the world, and is one of the best inventions in the history of technology. Everyone wants the iPhone but people also want it to be unique. This desire to be unique attracts iPhone buyers to Zagg products which gives it more style and protects the expensive phone from scratches or other damage. Zagg has controlled this industry with very little significant competition. It's the primary choice among buyers and it's products are located at just about every store that an iPhone is sold.

I must say, I was very surprised at the lack of stock performance in shares of ZAGG when Apple announced its quarterly sales. There were several stocks that were positively affected such as semiconductor and other part manufacturer companies. But ZAGG which may be the largest beneficiary to high iPhone sales has been relatively quiet as earnings approach. I have personally bought two of the iPhones, the 3 and 4, and are currently awaiting the iPhone 5. Every time I purchase an iPhone the sales person always asks me to purchase a ZAGG protective case, skin, etc. In addition to my iPhone skins I also own an invisibleSHIELD for my Kindle Fire and I've bought an all-in-one iPad 2 companion which works like a charm. The demand for Apple, Amazon (NASDAQ:AMZN), and other mobile devices has never been higher and there are several consumers, such as myself, that are loyal to ZAGG and purchase a ZAGG product with every new device.

In addition to the iPhone affect for high ZAGG sales the company also creates popular products for other phones and tablets. Apple also announced incredible sales growth for its iPad, in which ZAGG creates products as well. And despite Research in Motion's (RIMM) lack of innovation the company has released several new phones that have been quite popular among the consumer. ZAGG benefits from the competition among these handset manufacturers, that all fight to release new phones and tablets as quickly as possible.

Tablets and mobile phones are selling at record rates and ZAGG is quietly reaping the rewards. Investors have chosen to ignore the impact that such high sales could have on ZAGG's earnings because of fear that its business model isn't sustainable, along with concerns over lower margins. The company has been developing new products to match the speed of new phones and tablets. It's also the best positioned to succeed over all other competitors, because it will simply purchase the competitors such as iFrogz. The company's sales continue to double year-over-year but in this particular quarter I anticipate an increase in growth to reflect the high sales of Apple, RIMM, and similar company's success.

Zagg already announced record sales during the Black Friday and Cyber Monday event weekend. According to ZAGG's press release it nearly doubled total sales year-over-year during its holiday special and had a 234% improvement in total visitors during a 24 hours window on Black Friday. Overall, I think this, along with the new devices, suggest a strong quarter in which ZAGG is well positioned for massive gains following its earnings report.


In my opinion, these two stocks present very little downside but significant upside following earnings. ZAGG is trading nearly 50% from its 52 week high with a P/E of 23. PEIX is trading with record sales and an all-time best in gallons sold but also a 99% loss over the last five years. Therefore, I don't think there is much downside risk to PEIX and I further believe that this earnings report will send it trading to a new level, along with ZAGG.

Each stock is trading with a different level of momentum. PEIX is trading higher in anticipation of strong results. If it can post similar numbers to last quarter then it wouldn't take much for this $100 million company, that records $800 million in sales, to increase by 30-40%. On the other hand, ZAGG is trading with caution, but I believe that if it can prove that margins are stabilizing and it capitalizes on tablet and phone sales then it could easily jump 20-30%. I don't think there is a significant amount of risk in either company but the upside potential for this earnings report is unprecedented for both the immediate and future trend of both companies.

Disclosure: I am long AAPL, ZAGG, PEIX.

Additional disclosure: I plan to increase both my position in ZAGG and PEIX prior to earnings.