Stocks Worth Buying Prior To Earnings: Week 2

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 |  Includes: AAPL, BAC, BAS, CMG, ETFC, FITB, JPM, QCOM, SCSS, TPX, UA, WFC
by: Brian Nichols

Last week I saw several reasons to be optimistic as we enter the second week of Q2 earnings. My overall return was near even for the first week of this series, but then again, I only used $10,000 of my $24,000 starting bank. For those of you who are reading this piece and unfamiliar with my earnings strategy then I urge you to see this link for more details and read last week's article that will provide more insight into the strategy being used. In week two I will be using a variety of strategies which includes buying stocks just before earnings, but also buying after earnings are announced. Before we get started take a look at how the stocks I purchased in week one performed, and as you will see, I have only sold two of the stocks I bought in week one.

Company

ticker

$ Spent

Buy Price

Sell Price

Gain/Loss

Gain/Loss

Google

(GOOG)

$3,142

$628

$631

$3,155

$13

Alcoa

(AA)

$2,016

$9.60

$10.20

$2,142

$126

Wells Fargo

(WFC)

$2,542

$33.00

JPMorgan

(JPM)

$2,467

$43.30

Week 2 balance

$24,139

Click to enlarge

I have stated on several occasions that I am not too bullish that this earnings season will be as rewarding as Q1. I think there are several companies that will report strong results but I think the market will be very volatile which will cause some stocks to trade lower regardless of earnings. In this earnings season I hope to take advantage of stocks that trade lower despite strong earnings, and believe that by buying stocks that trade lower after strong earnings significant gains can be accumulated. We must remember, playing earnings is not only buying a stock before it announces earnings, it is also the trend before and after earnings are announced. I call the purchasing of stocks that trade lower after strong earnings the "HOG Effect" and believe that because of volatility there will be several stocks that fall in this category during Q2.

HOG Effect Buys For Week Two

If you read my earnings article last week then you know that I purchased shares of Wells Fargo and JPMorgan before either company announced quarterly results. You also know that both stocks traded lower following earnings throughout the day on Friday. However, I believe both companies are the first to fall in the category of stocks that trade lower after earnings despite strong earnings, because of market conditions. As a result, I did not sell my shares after either company announced earnings and both will be held into week two, and perhaps longer as I wait for both JPM and WFC to appreciate and trade higher. I bought $2,500 worth of shares in both companies (JPM @ $33 & WFC @ $43.30) and will update readers via twitter and stocktwits (accounts that were recently created) upon my selling of either stock.

Standard Earning Plays For Week Two

In Q1 and during the first week of this earnings season I stuck to a basic strategy of buying stocks before earnings. In week two I also plan to exercise this strategy and buy several stocks before earnings that I believe will exceed expectations.

The first stock I will be buying is Select Comfort (SCSS), a company that is expected to post $0.39 when it announces earnings on Tuesday. The company has been one of my safe stocks over the last two years, since it has performed with exceptional results during each quarter. My only concern is its near 60% return YTD and the high expectations among investors. The stock traded higher by nearly 2% on Friday despite the market trading significantly lower. Therefore, I believe that if the company doesn't beat expectations it could fall by a large margin. I definitely feel as though this is a stock you want to buy early rather than later, but want to be conservative, which is why I am only buying $2,000 worth of shares.

Qualcomm (QCOM) will announce earnings on Wednesday and is expected to post $0.95. Most expect the company to exceed expectations as a result of continuously strong performance. It's not a stock that is likely to trade higher by 10%, but could return a decent gain of 3-4% following earnings. Therefore I am buying $3,000 worth of shares prior to earnings and will look to buy on Monday in hopes of gains before the company announces its results.

Basic Energy Services (BAS) is my under-the-radar stock to announce earnings this week. The stock has lost 20% of its value YTD, yet is one of the fastest growing small companies in the energy sector. The stock is ridiculously oversold and undervalued, with a forward P/E ratio of just 5.50, revenue growth of 70% year-over-year, and a near $100 million differential in net income from 2010 to 2011 (not bad for a $600 million company). Overall, I see very few risks in a stock that could easily pop 30%, which is why I am buying $3,500 worth of shares before earnings, and look to ride this stock much higher.

Both JPM and WFC exceeding expectations with a surprisingly strong report on mortgage revenue yet traded lower on Friday. It reminds me of Q1, when both companies announced strong reports back in January but traded with little optimism. Both stocks then reversed to trade higher following the surprising report of Bank of America (BAC) and a surprising rally in the market. It seems as though the same events are being presented. Both JPM and WFC posted a strong quarter, and the mortgage revenue was a much needed bonus. As a result I am buying Bank of America prior to it announcing earnings on Thursday and believe it will exceed expectations of $0.12. This next week will be huge for the financial sector with the majority of large financial institutions and regional banks scheduled to announce earnings. I believe BofA is among the cheapest in terms of fundamentals and will most likely trade higher. As a result I am buying $2,500 worth of shares, which brings my total position in the financial sector up to $7,500 for week two (counting JPM and WFC).

Buying In Advance

As I said, earnings can be played three ways: just before the company announces results, following good results, or the week(s) prior to a company announcing earnings. As most are aware, Apple (AAPL) lost over $30 billion or nearly 6% of its valuation during the last four days of the trading week. The loss has been fueled by potential lawsuits, downgrades, battery questions, and a slew of other key developments. However, I believe the recent loss is nothing more than the stock being pushed lower prior to earnings, so people like me can buy more shares. The market is expecting blockbuster results from Apple when it announces earnings in two weeks. And I think it is almost unimaginable that AAPL isn't trading at all-time highs in the days before it announces, what most believe, will be yet another quarter of crushing the street's expectations. On Friday, I saw the opportunity to buy shares at just $605, and believe it could be the best opportunity to buy shares ahead of earnings. Therefore I purchased 8 additional shares ($4,840) to add to my already portfolio leading position in preparation of a quarter that could lead to AAPL crossing $700 in the very near future.

Possible Buys

As of now, I have already purchased shares in AAPL, are holding my shares in JPM and WFC, and plan to buy SCSS, QCOM, BAS, and BAC at some point before each company announces earnings. This upcoming week consists of more earning strategies than I have ever used in a Seeking Alpha article. The reason is simple, I believe there are a number of opportunities for this upcoming week that are beneficial in different ways. You may notice that my current holdings and my upcoming buys for week two equal less than $21,000, which leaves me with $3,000 to use. I believe this could be one of the best weeks in quite some time, therefore I plan to use the remainder of the $3,000. Therefore, I am closing with a number of "possible buys" for week two, that you may also want to consider trading. If you wish you may view my trades on this webpage. So I will conclude with a few additional ideas for week two, one of which I will trade with my remaining balance.

E TRADE (ETFC) will announce earnings on Thursday and is expected to post an EPS of $0.09. Last quarter the company's earnings were decent but were still somewhat disappointing. I think expectations may be low enough to where it can surprise Wall St. However, it is important to realize that trading volume has been light in Q1, and expectations are very low for investment services companies. I plan to watch competitors Charles Schwab (SCHW) and TD Ameritrade (AMTD) and the strengths and weaknesses of each company, since both announce before ETFC. If SCHW and AMTD are strong then it could indicate a strong quarter for ETFC, and then I would possibly purchase the stock.

I like regional banks as a long-term investment over large money center banks, but I am not sure how the industry will perform during this specific quarter. Three of the best regional banks will announce earnings this upcoming week: PNC Bank (PNC), Huntington (HBAN), and Fifth Third (FITB). Both HBAN and PNC will announce before FITB and could indicate any strengths or weaknesses for the quarter, therefore if HBAN and PNC exceed expectations I will most likely purchase shares of FITB.

Chipolte (CMG) returns about half the revenue of Darden (DRI) yet is twice the size, according to valuation. The company trades with a P/E ratio of more than 65 and an equally high price/sales. Some believe margins could fall due to higher costs, therefore it may be wise to short the stock. If it trades higher leading up to earnings I will short the stock.

Under Armour (UA) is another stock that's had a good run that could come crashing down to earth. It trades with a P/E ratio above 50 and is expected to post a slightly better year-over-year EPS. The decision to short UA would be tough for me. I think it is a great company that is just scratching the surface of its potential and could easily be acquired by a number of companies. However, every company has a quarter that looks weak and I think UA could be a good short if margins decline as many analysts expect.

A stock I am very likely to buy is Tempur-Pedic (TPX). The company is expected to post $0.84 in earnings, and will announce quarterly results two days following the results of SCSS. In the past, the mattress companies have posted have similar earnings, in terms of performance, and if SCSS trades higher then I feel confident in TPX following its footsteps. But much like SCSS the expectations are very high for this company and its trading at all-time highs with a much higher valuation than during previous earning reports. And with Mattress Firm (MFRH) announcing a strong quarter earlier in the week, it is almost a given that TPX will trade higher leading up to earnings, assuming SCSS beats.

Disclosure: I am long AAPL, JPM, WFC.

Disclaimer: The information in this article is not intended to determine any investment decisions. All investment strategies should be discussed with a financial advisor to assess risk and determine whether or not it fits into your individual goals.