Here we go again.
Did last week remind you of anything? A similar market selloff occurred at the beginning of the last earnings season. It seems that market participants had another case of pre-earnings jitters. Stocks dropped more than 2 percent for the week as fears regarding global growth undermined several earnings beats, including JPMorgan Chase (JPM).
Just as I stated last quarter, use this weakness in the market as a buying opportunity. China's trade surplus expanded in September as exports were up on enhanced overseas demand and imports recovered slightly, providing unexpectedly positive news. I posit that markets may have overreacted somewhat to the downside.
I have selected five companies reporting earning this week that I believe are poised to move higher. With the recent sell off, these companies are a bargain. When they report positive earnings results they will be rewarded rather than sold off.
In the following sections we will perform a review of the fundamental and technical state of each company reporting earnings this week. The following table depicts summary statistics and Friday's performance for the stocks. The following charts are provided by Finviz.com.
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The upside on the read-across leads us to believe BAC will post a beat to the Street in the quarter and gives us increased confidence around our $0.15 operating estimate.
Bank of America Corporation
BAC reports earnings on Wednesday the 17th before the market opens. I am long BAC. The company is trading 10% below its 52-week high and has 4% potential upside based on a consensus mean target price of $9.47 for the company. BAC was trading Friday at $9.12, down 2.36% for the day.
Fundamentally, BAC has several positives. BAC insider ownership has increased by 66.39% over the past six months. The company has a forward P/E of 10.02. BAC is trading for 6.94 times free cash flow. BAC has a net profit margin of 11.62% and a PEG ratio of 1.38. BAC is trading for approximately 42% of book value. EPS next year is expected to rise by 167.65% and the company pays a dividend with a yield of .44%.
Technically, BAC looks good. The stock broke out of a descending triangle to the upside at the beginning of August. The coveted golden cross, where the 50-day SMA crosses above the 200-day sma, was fulfilled earlier this year. I went long BAC at this time. I have found the golden cross to be a key metric in picking winners. The stock is trading 7% above the 50-day SMA currently. BAC is a steal at these levels.
MS reports earnings on Thursday the 18th before the market opens. The company is trading 18% below its 52-week high and has 16% potential upside based on a consensus mean target price of $20.08 for the company. MS was trading Friday at $17.31, down over 3% for the day.
Fundamentally, MS has several positives. The company has a forward PE of 8.74. MS is trading for 1.32 times free cash flow and approximately half its book value. EPS next year is expected to rise by 130%. MS currently pays a dividend with a 1.16% yield.
Technically, the stock looks good. It is in a well-defined uptrend. The stock has posted higher highs and higher lows since mid-July. It has been on fire so the recent period of back and filling was completely logical. If you look at the chart, MS is on track to fulfill the coveted golden cross. I plan on going long prior to earning.
eBay Inc. (EBAY)
eBay was trading for $40 the day of my initial recommendation in July. PayPal's mobile payments service is the key to eBay's growth. eBay's mobile payment business has exploded from a few hundred million dollar business in 2009 to a $7 billion business in 2012. The combination of eBay's mobile payments growth and cost cutting efforts should allow them to continue to beat estimates and raise guidance.
eBay reports earnings on Wednesday the 17th after the market closes. The company is trading 6% below its 52-week high and has 8% potential upside based on a consensus mean target price of $51.80 for the company. eBay was trading Friday at $47.85, up nearly 1% for the day.
The company has many fundamental positives. eBay has a net profit margin of 28.66%. eBay has a forward PE of 17.59, a PEG ratio of 1.23 and a return on equity of 21.25%. Quarter over quarter sales and EPS growth are 23% and 146% respectively.
Technically, eBay looks good. eBay is in a well-defined uptrend. The stock is currently resting at the bottom of the current uptrend channel just above the 50-day SMA. I like the stock here.
General Electric Company (GE)
The positive report out of China bodes well for GE. I surmise that the bar has been set extremely low for GE's earnings this quarter. GE is a well-managed company that is positioned to take advantage of the significant growth coming out of China. Sometimes I think people forget that when we talk about Chins slowing, we are talking about going from 8% to 7% which is still substantial.
GE reports earnings on Friday the 19th. The company is trading 3% below its 52-week high and has 10% potential upside based on a consensus mean target price of $24.69 for the company. GE was trading Friday at $22.48, down slightly for the day.
The company has many fundamental positives. GE has a net profit margin of 9.83%. GE has a forward PE of 12.99, a PEG ratio of 1.51 and pay a 3% dividend. Quarter over quarter sales and EPS growth are positive. The company trades for 19 times free cash flow.
Technically, GE looks great. GE is in a well-defined uptrend. The stock is currently resting just above the 20-day SMA at the mid-point of the uptrend channel. The bottom of the current uptrend channel is the 50-day SMA which should provide ample support as GE's stock continues to rise. I like the stock here.
Halliburton Company (HAL)
Halliburton is trading up 19% from the day of my initial recommendation in June. Halliburton's profit streams are stable. The company is one of the oldest and most trusted oil service companies in the business. With all the recent turmoil in the Middle East beginning to boil over, I expect Halliburton to do quite well going forward.
Halliburton reports earnings on Wednesday the 17th before the market opens. The company is trading 16% below its 52-week high and has 28% upside potential based on the consensus mean target price of $43.42 for the company. Halliburton was trading Friday for $33.80, down almost 1% for the day.
Fundamentally, Halliburton has some positives. The company has a forward P/E of 10.12. Halliburton pays a dividend with a yield of over 1%. Halliburton's expected EPS growth rate for next five years is 18%. The current net profit margin is 11.34%. Halliburton's PEG ratio is .55.
Technically, Halliburton has been on fire since June. The company pierced the 200-day SMA at the beginning of August and retested it once again at the beginning of September and has pulled back to just above the 200-day SMA now. The RSI was indicating the stock was overbought in my last update, now is the time to start a position.
The Bottom Line
Most of these stocks have been on great runs over the past couple of months. Several of them still have improving fundamental and technical pictures. I see the recent pullback as a buying opportunity going into earnings. The earnings outlook for this quarter seems exceptionally weak to me. I posit these stocks will surprise to the upside with the bar being set so low. They all have positive catalysts for future growth and I expect guidance to be raised or at least reiterated.
But don't take my word for it. Do your own due diligence and decide for yourself. I have a certain portion of my portfolio allocated for earnings trades. If you choose to start a position in any stock, I suggest layering in to reduce risk. Furthermore, set a 5% trailing stop loss to minimize losses further if you wish.
Disclaimer: This is not an endorsement to buy or sell securities. Investing in securities carries with it very high risks. The information contained within this article for informational purposes only and is subject to change at any time. Do your own due diligence and consult with a licensed professional before making any investment decisions.