5 Stocks To Be Careful With Going Into Earnings

by: Bill Maurer

For some, we are entering the most wonderful time of the year. No, it's not the holiday season, or back to school time. It's earnings season! Each quarter, I publish a list of stocks to be careful with going into earnings. Now sure, you could say that you need to be careful with every stock going into earnings. But not every investor owns every single stock out there. Most don't, even if they do hold some exchange traded funds. Some investors may only hold a dozen or so names, and some longer term investors may not care about a single earnings report by itself.

When I did the first be careful into earnings article, I was focused only on names that could fall after earnings. For my second earnings season article, I focused on both sides of the trade. That is, I also included names I would not be short into earnings. To change things up this quarter, I will suggest possible options trades for some of the names. Now, let's get into it. Happy earnings season everyone!

Apple (AAPL): I included Apple on my list last quarter because there were a lot of questions after the previous quarter's earnings "miss". This quarter, I am putting on it the list only because of the huge run we've seen over the last few months. Apple, the day it reported earnings last quarter, closed at $420.41. Last Thursday, it closed at $633.68. That's more than a 50% gain, and we're not exactly talking about a small cap name here.

So what about this quarter? Well, I recently had a mini-preview into Apple's earnings. My formal Apple earnings preview and predictions article will come in the next week or two. But here are some things to remember. It isn't a holiday quarter, and it is a regular, 13 week quarter (the blowout quarter was 14 weeks long). Analysts are currently expecting 46% year over year revenue growth and more than a 50% jump in earnings per share. Apple could easily blowout again. The new iPad has sold a few million units already, so if they got a fair amount of iPad sales during the rest of the quarter, that number will be fine. Apple also released the iPhone 4S in Mainland China during this quarter, so don't expect much of a letdown over last quarter's huge sales number there.

Apple is certainly capable of crushing estimates, but that doesn't necessarily mean we could see another huge rally afterwards. In terms of the stock, I would favor longs if the name is in the $550 to $600 range into earnings, I would (personally) be neutral in the $600 to $650 range, and I would be a bit cautious above the $650 mark, especially if we are up to $675 or even $700 into earnings. Remember, just because an earnings report is good doesn't mean the stock has to go up.

Now, for Apple, I'll give you some options advice. I'm going to avoid talking about the weekly options at the moment; I'll cover those right before earnings. But let's look where we are now. Since Apple is releasing earnings on the 24th, you have to go to the May options if you are trading monthly options. Currently, with the stock at $633 plus, the $630 calls cost you more than $33. That would mean you would need the stock to rise $30 just to break even. It could do that. But try to avoid higher priced calls.

For example, the $670 calls would cost you nearly $17, meaning Apple would need to rise to almost $690 for you to break even. The chances of that are less than the at the money calls breaking even. If you really are convinced Apple will go up, you might want to sell some out of the money puts. For example, you could currently sell the May $610 puts for about $20. If Apple declines, you may be forced to buy the stock at $610, but your effective price is $590 because you received the $20 premium. Remember though, each contract is 100 shares, so you'll need to put down a lot for margin, and a lot to buy the name if you need to.

Netflix (NFLX): One of the most famous battleground stocks will report the day before Apple. When I first wrote about Netflix in the first "be careful" article in October, I warned against being long into that earnings report. I could not have been more correct, but I wish I had listened to my own advice, as seen from the following quote.

I'm hoping for a terrible quarter. I'd love to see the stock get punished again. Why? Because I think it would create an excellent buying opportunity.

Wow, I didn't even realize I had said that until I started writing this article. Had I bought Netflix near its $62 low, or even at $65, I could have doubled my money. I wasn't willing to take the risk, and I missed a huge buying opportunity. Oh well, it happens.

So what's going to happen this quarter? Well, if you give me a coin, we can flip for it. That might sound unusual, but really, does anyone have any clue what will come out of Netflix? Current estimates call for a 27 cent loss this quarter, and a 24 cent loss for the entire year, and remember, Netflix said they expected to lose money in 2012. However, if they beat for the first quarter, it is possible that they could make a profit this year if things are in fact better than expected. They could also post a bigger than expected loss, which might then start to raise questions about next year's profitability.

Either way, my recommendation is to just avoid the name. A bad report probably sends us back to $75, but a good one could get us to $150. Monthly options are expensive for this volatile name. It would currently cost you $10 for an at the money call or put. If you expect more than a $20 move by the middle of May, it might make sense to buy some of each (calls and puts). Of course, weekly options could make sense too, given the Monday earnings report. You'd still have a few extra days even if you don't hit your target the day after earnings. Personally, I would just stay away, but if you are willing to take the risk, you will make money if you play it right.

Green Mountain Coffee Roasters (GMCR): Green Mountain seems to be hitting an important point in the company's history. Starbucks (SBUX) has launched its own single serve espresso machine, but Starbucks also expanded its partnership with Green Mountain. We're not quite sure what that exactly means.

Green Mountain is still in an explosive growth stage. Quarterly revenues are expected to be up 50% over last year's period, which was at the higher end of the company's provided guidance. Earnings per share are expected to be up about a third, and analyst estimates are near the higher end of the company's range. The company has beaten estimates handily in three of the past four quarters. In fact, their only miss was by a penny, which was quite good considering they missed revenue estimates by about $50 million, or roughly 7%.

Green Mountain had a great holiday quarter, but shares have tumbled from the $70 level where they were recently. We are now below $45. This quarter's report could be one where the company firmly shows they are not a fluke, and completely answers all of those questions about its growth prospects. Should they do that, $70 will be coming quickly. If they fall flat, watch out below. I'm tempted to favor the long side, and May $45 calls will only cost you about $4 right now.

At or near the money calls seem like a good way to play it. You won't lose a ton if the company falls (it could easily lose $10 or more with a bad report), but you still have plenty of room for upside. Of course, you could always go long and buy an at the money put for a little more than $4, which would limit your losses on the down side, but would also limit your upside by your purchase price. That might be a better way to play it.

Groupon (GRPN): Groupon makes its first appearance on my "be careful" list, and rightly so. The company's accounting has come into serious question recently after they revised earnings, lowering revenues, operating income, net income, and earnings per share.

The revision to earnings has many worried, and has forced analysts to take down estimates for this quarter, next quarter, this year, and next year. The stock has lost nearly $5 since the news, and is down from more than $24 in February.

This quarter might be one where they need to not only produce a good number, but to assure investors that their accounting is alright. They also need to be profitable. Last quarter, estimates called for a three cent gain and they lost two cents a share. The company needs to make money, and if it doesn't, shares will drop further. Like Netflix, I would pass on this one for now.

Priceline (PCLN): Like Apple, this has been a great performer so far this year. The stock is up almost $300 this year, and yes, that number is correct. The online travel firm just keeps rising, hitting another new high on Friday.

I'm not expecting a bad report from them, although if gas prices rise too much more, a concern will really start to build. Priceline, like Apple, has been known for its very conservative guidance, which could cause some profit taking after this report, especially if we get to $800 or more into earnings. Priceline has done very well and is the darling of its industry right now, but its astronomical rise has put some caution into this analyst's mind.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GMCR over the next 72 hours.