As a writer, I like to provide the best possible analysis to the investment community. I make a great effort not only to help readers and investors make money, but also try to prevent them from losing money. I publish an article each quarter, in a continuing series, that focuses on stocks to avoid going into earnings. I have changed the theme slightly over time, but the process remains the same. Don't lose money during earnings season! Now, just because I say to be careful or avoid something doesn't mean I think a stock will decline post-earnings. There are just certain times where I believe long-term investors are best served by staying away.
I'll first provide the links to previous articles, for those wanting to see how the series has evolved. In the following bullets, the quarters I am representing the calendar quarters. The companies I discussed may be on a different fiscal calendar, so for instance, Q3 2011 represents the "quarter" ending in September of 2011.
- Q3 2011 - 6 Stocks To Be Careful With Into Earnings
- Q4 2011 - 7 Stocks To Be Careful With Into Earnings
- Q1 2012 - 5 Stocks To Be Careful With Into Earnings
Now, I haven't been 100% right on all names I have covered, but I've been pretty correct on a majority of them. I don't claim to be perfect, and with any of the names I cover, a bad report could send them higher, and a good report could send them lower. That's just the way the market works sometimes. One other thing to consider. Some of these names may not report their earnings for several weeks. Depending on news between now and then, the analysis might change, so always do your own research before following these recommendations. I will do my best to update any information I feel important to these names in the comments section, especially if it changes my opinion on the name.
So here are 5 stocks to be careful with going into earnings:
Facebook (FB): The social networking firm will release its first quarterly earnings report as a public company on July 26th. For me, there are just too many questions here, which is why I would just avoid this name through earnings. First, who is going to speak, both in the press release and on the conference call, and how will that call be structured? Second, how is it going to present the report, and what kind of guidance is it going to give.
Those are just questions regarding the structure of the report. Then there is the financial side of it. Analysts are expecting about $1.15 billion in revenue and earnings per share of $0.12. Will Facebook meet these numbers, blow them out, or will it miss and the growth be questioned? We've seen these social names beat big and miss big.
Facebook is basically in the middle of its trading range right now. Everyone will be watching the earnings report, meaning it will be another circus like the IPO. I don't see the stock really jumping on a good report, but a bad report will certainly take the name down. To me, there are just too many questions involved. I would recommend investors stay away until after this report and then evaluate their position in the name.
Green Mountain Coffee Roasters (GMCR): Green Mountain has been on this list in the past, and it will be another one I recommend avoiding this quarter, especially for long-term investors. Many would expect this one to move by 20% or more after earnings, so it will not be a trade for the faint of heart. Green Mountain is expected to announce earnings late this month or in early August.
I analyzed where this name stood a few weeks ago, and that is the basis for my recommendation. Two quarters ago, Green Mountain announced it would be changing the models used to forecast future numbers (how it gives forward looking revenue/earnings guidance). Last quarter was the first quarter with the new guidance, and it was pretty bad, as it lowered expectations for the quarter and fiscal year (ending September). Given that we've heard recently about numerous supermarkets and grocery stores trying to enter this space, Green Mountain could easily take down guidance again. Remember, this company has reported revenue well below expectations in two of the past three quarters.
Analyst expectations have come down, but I've continued my stance that I would like to see them come down even more. I'm just not that sure what Green Mountain is going to say, and that worries me. Remember, the founder and another board member were forced to resign from the board after receiving large margin calls on their stock.
Even with a good report, long investors may be worried going into the following quarter. This company has not been able to put two good quarters together in a while, and that is why the stock keeps going lower and lower. One more bad report, and the future growth of this company, which is already in question, will be heavily scrutinized.
Amazon (AMZN): Could this be the quarter where Amazon posts a net loss? With some analyst estimates calling for a loss and a consensus currently of just 2 cents, it is not out of the question. Amazon is growing revenue, but not earnings, which is why the stock is currently trading at 183 times this year's expected earnings. Amazon is expected to announce earnings later this month.
At some point, not only is the growth going to stop, but the valuation is going to come crashing down. Amazon's Kindle Fire hasn't sold much after its first quarter, and the tablet competition is heating up thanks to Google (GOOG) and Microsoft (MSFT). Amazon is rumored to have a second version coming out later this year or early next year, but it is now a much more crowded space.
Amazon's stock is now at $225, with the 52-week high at $247 and the average analyst price target at $255. Should this name rally into earnings and be near the 52-week high, I would be very conservative going into the report. At those levels, there would be a significant amount more downside than possible upside after the report.
Sprint (S): Many of my readers know that I have been a Sprint bear for quite a while due to the massive debt load, extreme losses, and several other issues. I'm not here to debate any of those right now.
Today, my Sprint point relies more on the recent rally we have seen. The 52-week low is $2.10 and just about 2 months ago we were at $2.25. Sprint has rallied hard lately, hitting a high of $3.48 in the past week, although it traded down to $3.29 by Friday's close.
Sprint is going to report another huge loss this quarter, the only question is how much. Sprint is increasing revenue thanks to the iPhone, and is working on upgrading the network, but that really is not going to help profitability for now. Sprint will report earnings on 7/26.
So my fear is that even if Sprint beats estimates, we will see some profit taking if shares rally into this report. I wouldn't be as pessimistic with shares at $3, but if the company goes into the earnings report at $3.50, or maybe even higher, be very careful. Traders have a way of using earnings reports for profit taking, even with a good report.
JPMorgan (JPM): We are expecting to hear more about the losses on that bad trade when JPMorgan reports on July 13th. Initial reports on the loss were set at $2 billion, but then we heard that those numbers would be increased. Some rumors have claimed that JPMorgan will have lost $9 billion from the trade, but most believe that the $4 billion to $6 billion range is more likely.
It is not projected to be a good quarter for JPMorgan to begin with. Current estimates call for a 20% year-over-year revenue decrease, from $27.41 billion to $21.91 billion. Earnings per share are forecast to decline from $1.27 to $0.79.
JPMorgan was almost at $47 at its 52-week high. The stock was still above $40 before the trading loss was announced. Since then, the stock has dropped, rebounded, and declined again. It sits just under $34 right now, just about $3 off the recent low. If the stock is in the low $30s, it could be a decent buy going into earnings. However, there are a few questions that need to be answered, and more clarity on this trading loss would certainly help. The quicker that issue gets resolved, the sooner shares rebound in my opinion. But if the announcement is bad, this name is going to probably test $30. For that reason, I would stay away and see what is said.
Remember, the point of this article is stocks to "be careful with" going into earnings. That doesn't necessarily mean you can't be long or short these names into and through earnings. Yes, in some cases, I am recommending you just stay on the sidelines. There are great profits to be made by traders who guess right, but you can also lose a ton of you are long. Green Mountain fell nearly 50% after its latest report. You don't want to wake up the next day and see your stock down 50%. These are five names to definitely be careful with into earnings, and I may add a few in a follow up article if readers want more.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.