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Last week, I returned nice gains playing earnings prior to the company announcing quarterly reports. It was a good demonstration of stocks that all traded higher prior to announcing, exceeded expectations, and then some that traded lower (but still returning gains). One thing I have tried different this quarter is posting my transactions. Last week, I was able to post the majority of my activity, which included eight additional shares of Apple (NASDAQ:AAPL) and when I took profits of Sprint (NYSE:S). I will continue to provide updates via twitter @bnichols9883 or on stocktwits @BrianNichols throughout this next week. So let's take a minute to look at last week before going further into this upcoming week's plays.

Company Ticker $ Spent Buy Price Sell Price $ Returned Gain/Loss
Apple AAPL $4,800 $600 $615.55 $4,924 $124
Apple $4,516 $564.50 $585.00 $4,680 $164
Sprint S $3,525 $2.35 $2.59 $3,885 $360
Caterpillar CAT $3,498 $106.00 $105.40 $3,478 ($20)
Coinstar CSTR $3,117 $62.35 $65.60 $3,280 $163
$791
  • I bought AAPL two weeks ago when it fell to $600. I had assumed that it would trade higher leading up to earnings. But when that did not occur I tweeted that I would buy eight additional shares at $564.50 (actually $664.50) and then also sold following earnings in afterhours at $585 because I feared that it would fall because of previous selling pressure. The following day I tweeted a stop-loss at $610 but once I saw that it was maintaining and not going higher I sold at its current price, which turnout out to be a good idea.
  • Sprint achieved subscriber growth, sold 1.5 million iPhones, posted significant revenue growth, and exceeded bottom-line expectations with a narrower loss. It initially jumped higher over $2.65 and then held the price through premarket and into the open. However, this stock has a long history of jumping in premarket, then fading. Therefore, I tweeted my stop-loss at $2.59, which was executed. I will note that Sprint is one of my larger holdings and is trading near my initial buy price. I plan to hold but the company must get some control over its debt in the near future. However, as long as the company continues to make improvements I will hold because I think it is worth more than at any period over the last two years, yet is trading near lows.
  • Caterpilllar was a little short on revenue expectations but posted record earnings and raised its guidance from $9.25 to $9.50. I was a little hesitant of this trade going into earnings because it had shown an inability to exceed its current level. However, it hadn't failed me for several quarters. Therefore, I played the stock conservatively and sold once I noticed that it was going lower.
  • Coinstar was a stock that I really liked going into earnings. The company had issued guidance and popped huge on April 13 but then fell back during the following week. I had decided to buy the stock on Monday because I felt it would trade higher as most expected solid earnings. The company exceeded both top and bottom line expectations, yet traded lower as a result of earnings already being priced into the stock. I tweeted my sell.

In week four I have a total of about $24,500 to play earnings. However, I do not plan to play the entire amount (like all weeks) and I plan to diversify it much differently. I have stated on several occasions that there are three ways to play earnings: before, during, or after the announcement. In week three I thought it made more sense to play earnings before earnings, but in week four I think there are stocks that traded illogical, which I call the HOG Effect. The HOG Effect is what I call stocks that trade lower after great earnings for no logical reason, usually just a domino effect of panic, as investors sell and are unsure of why they are selling. I call it HOG Effect because of my experience with Harley Davidson (NYSE:HOG) in 2011 after it announced great earnings.

After Earnings

Spectrum Pharmaceuticals (NASDAQ:SPPI) is one of my favorite companies and is also one of my largest holdings; and it traded significantly lower after announcing great earnings. The company announced revenue of $60 million and record earnings of $0.71 or $46.5 million.

Fusilev is the company's primary money maker and it grew to $51 million compared with $35 million year-over-year. In addition the company will be implementing FOLOTYN into its growth strategy, which is a $50 million year drug. The only problem I see is that Zevalin sales did not show the expected progress. The company made a big deal about the bioscan being lifted and just paid Bayer a lot of money to expand Zevalin with a global marketing strategy. The company now says there is a regulation that could take nearly a year to work out, which means Zevalin sales won't be as robust as expected. However, Fusilev sales are continuing to grow even faster than expected.

Thestreet.com points out the drug's revenue in the first three months of 2012: $13.8 million, $18.5 million, and $23.3 million. It appears the growth for this company will continue despite Zevalin and because of it being ridiculously valued I bought 670 shares at $10.40 on Friday. I believe this is a stock that will rise over the next couple weeks and return large gains following a reaction that simply doesn't make any sense.

Before Earnings

The first stock I will buy is Green Mountain Coffee Roasters (NASDAQ:GMCR). The stock has now dipped back into the $40s and is trading with very attractive metrics. The stock was one of my biggest gainers of last quarter and I believe it could be setting up for another big rally both before and when earnings are announced. There are problems for the future of this company such as Starbucks (NASDAQ:SBUX) entering the single serve space and expiring patents, but for now earnings and immediate guidance should be strong. The company is expected to post earnings of $0.64 and revenue growth of 50% and I believe it will exceed these expectations. Therefore I will buy $3,000 worth of shares prior to the company announcing earnings, probably on Monday.

I am a long-time owner of Mastercard (NYSE:MA) and almost always increase my position before earnings. The stock has traded higher over the last week but I think there is still upside for this momentum stock. It's expected to post earning of $5.29 when it announces earnings on Wednesday, and I will buy seven additional shares.

Level 3 (NYSE:LVLT) has traded lower over the last month by 15% despite some encouraging news. The company's integration with Global Crossing has been a major catalyst for growth along with its now upgraded infrastructure. I think expectations for the company are particularly favorable, therefore I will buy $3,000 worth of shares before it announces earnings (and will update via twitter).

Zagg (NASDAQ:ZAGG) has traded higher by nearly 15% following the results of Apple , as investors expect the company to benefit from strong iPad and iPhone sales. Analysts expect $0.14 per share, I believe results will be far better. This is perhaps the most under-the-radar company that is positively affected by our obsession with Apple. The good news is that the iPhone 4 and 4S have the same style and the new iPad looks exactly the same as the iPad 2. Therefore, it costs the company very little to make its products "ready" for the new Apple products. In many cases it's only the process of advertising the products as being Apple ready. I think we see improved margins and a big surprise from this company. I am buying $3,500 worth of shares of ZAGG.

Disclaimer: The information described in this piece is not to be used to make any investment decisions. All strategies and or decisions should first be discussed with a financial advisor to determine whether it may fit into your personal goals. The earnings series is to not suggest a particular investment but to educate others on a strategy. You can follow Brian Nichols' activity @bnichols9883. All earning expectations were obtained from whispernumber.com.

Source: Stocks Worth Buying Prior To Earnings: Week 4