This earnings season has been filled with disappointments that are seemingly fueling much of the fear of a slowing economy. Up until this point the market has ignored the problems that caused mass selling pressure during the final six months of 2011, as most sectors have returned very large gains in 2012. However, the problems in Europe are real, and I think we are now seeing a slowdown in corporate earnings as a result of the economic problems taking place in Europe. There are companies losing 20, 30, and 40% of its valuation with numbers that, in some cases, are just slightly below expectations. As someone who plays earnings these reactions have been frustrating but also serve as a reminder of the problems that plagued this market just a few short months ago, that could arise at any minute.
Last week after Green Mountain Coffee Roasters (GMCR) lost 50% of its value I promised myself that I would not play earnings until I see noticeable strengths among corporate earnings. And although I will stay true to my promise I do think it's likely that some stocks have sunk low enough to where we could see some strong reactions following earnings. There are two stocks that I am looking at in particular that announce this week: Sodastream (SODA) and Pacific Ethanol (PEIX).
The performance of both stocks shows a clear picture of the changing outlook among investors. Just a few short months ago both stocks traded higher by very large margins, leading up to earnings, but then fell hard once expectations were not met. Both have now fallen as earnings approach, rather than gaining, but are stocks that are definitely worth watching for the remainder of this week.
Over the last three months SODA has lost 30% of its value. The company hasn't released any news to suggest any immediate issues, but did respond negatively to the earnings report of Green Mountain Coffee Roasters. As a result, the stock has now lost 17% of its value over the last 5 days, which is a completely different trend compared to February when the stock traded from $39 to $48 the week prior to earnings, only to fall after not meeting expectations.
During its last quarter the company experienced slower growth and failed to meet the expectations of Wall Street. The company saw unit sales rise by only 8% which fell short of the expected 16% growth. In addition, other fundamental measures were a little soft leading to mass selling pressure because of the gains it posted leading up to earnings, as Wall Street had big expectations.
The reason I think investors should watch this company when it announces earnings on Wednesday is because expectations are so low. As a result, of the stock's recent performance it appears as though investors expect weak results, therefore any surprise could very easily lead to large gains. The company's business model may appear similar to GMCR but there are many differences, and SODA is arguably positioned better for the future. Its sales in the Americas were up 70% in 2011, despite the year being full of several operational changes. The company's products are now in almost 10,000 retail stores; recently adding Costco (COST), JC Penney (JCP), and Target (TGT). It also has a new licensing deal with Kraft that could very well open a whole new line of opportunities, and there is the upcoming electric soda maker that could attract even more deals. Overall, I wouldn't be surprised if the company exceeds expectations and reiterates impressive guidance, and with expectations being so low it wouldn't take much to send the stock trading higher.
In February Pacific Ethanol traded in almost the exact same pattern as SODA, but with more aggression. The stock increased from $1.09 to $1.61 in the two trading days prior to earnings but then fell to $1.22 following the report. However, the company's earnings weren't that bad, in fact, the earnings were very strong. It's important to remember that this is a company that was facing bankruptcy just a couple years ago, that has now grown at a remarkable rate, but continues to slip further.
During the company's most recent quarter it improved margins and posted a net loss of $2.4 million compared to a loss of $12.1 million in the year prior. The company grew revenue by 80% to over $240 million because of a 53% year-over-year increase in gallons sold. The fundamental progress has been impressive for this company, and it's making the right moves for sustained growth, by paying off its mountain of debt.
The stock is now priced under $0.90 with a market cap of near $80 million. For the first time in many years the company is profitable and is trading with a P/E ratio of under 10 and a price/sales of 0.08. This is a company that posted over $900 million in revenue and is selling a record number of gallons. The stock has traded with pessimism thanks to expectations being too high for its most recent quarter. Therefore, I believe it's very possible that PEIX could impress the market when it announces earnings on Thursday. As an investor, I am hoping this company impresses Wall Street because its progress from fighting bankruptcy is remarkable, and it's a stock that I believe deserves a valuation far beyond its current worth. The most noticeable difference between PEIX and SODA is that PEIX is growing much faster, in fact, there aren't too many companies growing at its speed, yet it has lost 20% of its value YTD.
These are two stocks trading with pessimism, partially due to the weakness of this earnings season but partially due to the assumed weakness of each company's most recent quarter. Yet if you look through the report for both companies I think you would notice that both announced very strong results in February, but expectations were too high. The expectations of a company are crucial to its overall performance, and with expectations being so low I wouldn't be surprised if one, or both, of these companies trade significantly higher during the second half of this week.
Additional disclosure: The material in this article is for informational purposes only and should not be used to make any investment decisions.