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 last week as fears regarding global growth undermined several earnings beats, including JPMorgan Chase (JPM).
The markets jumped the last two days as market participants used the weakness as a buying opportunity. Monday, China provided unexpectedly positive news as its trade surplus expanded in September as exports were up on enhanced overseas demand and imports recovered slightly. I have selected five companies reporting earning this week that I believe are poised to move on earnings reports this Thursday and Friday to review.
In the following sections we will perform a review of the fundamental and technical state of each company reporting earnings this week. Furthermore, we will review the positive and negative factors for each company that may affect the earnings and guidance results. The following table depicts summary statistics and Tuesday's performance for the stocks. The following charts are provided by Finviz.com.
Baker Hughes Incorporated (BHI)
Baker Hughes reports earnings on Friday the 19th before the market opens. Baker Hughes is trading 25% below its 52 week high and has 19% upside potential based on the consensus mean target price of $54.17 for the company. BHI was trading Tuesday for $45.58, up over 1% for the day.
Fundamentally, BHI has many positives. The company has a PEG ratio of .79 and is trading for 1.21 times book value. The company has a forward P/E of 11.23. EPS for the next five years is expected to rise by 14%. The company pays a dividend with a 1.32% yield as well.
BHI's stock was on a downward slide until the downtrend reversed in July to an uptrend until now. The glut in natural gas prices along with the gloomy outlook from Europe had shellacked the stock in the early part of the year.
Nevertheless, the negative sentiment by analysts was overblown and the company blew away lowered expectations for the second quarter. UBS has seen the light and recently reiterated their Buy rating on the stock and upped their price target to $65. BHI just broke through resistance at the 200 day sma. The stock is a buy going into earning. If they miss for some reason and the stock goes down I would buy on the weakness.
Schlumberger Limited (SLB)
Schlumberger reports earnings on Friday the 19th before the market opens. Schlumberger is trading 8% below its 52 week high and has 20% upside potential based on the consensus mean target price of $88.42 for the company. Schlumberger was trading Friday for $73.52, up over 1% for the day.
Fundamentally, Schlumberger has some positives. The company has a forward PE of 14.59. Schlumberger pays a dividend with a yield of 1.50%. Schlumberger's expected EPS growth rate for the next five years is 16%. The current net profit margin is 12.96%. Schlumberger has quarter over quarter sales and EPS growth rates of 16% and 27% respectively. Schlumberger's PEG ratio is 1.17.
Goldman Sachs upgraded Schlumberger from Neutral to Buy with a price target of $95.00 (from $88.00). The firm said Schlumberger is uniquely positioned to benefit disproportionately from three major trends: (1) a pickup of international margins and pricing given increasing activity both onshore and offshore; (2) increases in Russian drilling activity, where SLB is particularly strong; and (3) an improvement in the global seismic market. I concur with Goldman, SLB is a buy here.
Southwest Airlines Co. (LUV)
Southwest reports earnings on Thursday the 18th before the market opens. Southwest is trading 11% below its 52 week high and has 24% upside based on the consensus mean target price of $11 for the company. Southwest was trading Tuesday for $8.88, basically flat for the day for the day.
Fundamentally, Southwest has many positives. Southwest trades for 22 times free cash flow. The company has a forward P/E of 9.65. EPS for the next five years is expected to rise by 22%. Insider ownership is up 75% over the last six months. The company is trading for book value and has a PEG ratio of .92.
Southwest's stock achieved the golden cross, where the 50 day sma eclipses the 200 day sma. This is considered to be a very bullish sign for a stock but Southwest has remained flat. The combination of lower oil prices and zero exposure to Europe make this stock very appealing yet it hasn't really moved since last quarter.
I'm throwing in the towel on airline stocks. I say avoid the stock into earnings even though many are singing its praises. There always seems to be a price war or something negative to bring the stock down.
Microsoft Corporation (MSFT)
Microsoft reports earnings on Thursday the 18th after the market closes. Microsoft is trading 9% below its 52 week high and has 21% upside based on the consensus mean target price of $36.67 for the company. Microsoft was trading Tuesday for $29.49, basically flat for the day for the day.
Fundamentally, Microsoft has many positives. Microsoft trades for 11 times free cash flow. The company has a forward P/E of 8.96. EPS for the next five years is expected to rise by nearly 10%. The company has a PEG ratio of 1.67 and pays a dividend yielding 3.12%.
Technically, Microsoft has been stuck in a trading range between $29 and $32 for most of the year. Microsoft's stock had dropped through support at the 200-day sma which is a bearish technical signal.
I posit the drop in PC sales is not transitory, but a generational shift. A complete paradigm realignment regarding the way people access their information and communicate. The PC may become a thing of the past, taking up too much space like the cumbersome big screen TVs all the rage just a few years ago before flat screens. This is the same thing that is occurring now, except this time it is PCs to mobile devices. Microsoft is trying to navigate through the shift but I don't expect them to have a great quarter as they are current right in the middle of the process. I would avoid the stock into earnings.
Nokia Corporation (NOK)
Nokia reports earnings on Thursday the 18th. The company is trading 59% below its 52-week high and 17% above its consensus mean target price of $2.33 for the company. Nokia was trading Tuesday for $2.82, up 5% for the day.
Fundamentally, Nokia has some positives. Nokia is trading for approximately 91% of book value and only 25% of sales. EPS next year is expected to rise by 78%. Nokia pays a dividend with an 8.96% yield.
Technically, the stock has rebounded nicely since July and is currently in the beginnings of establishing an uptrend. The stock is currently in breakout position. The stock is at the apex of a descending triangle position. This is usually when a major breakout move will occur.
With a dividend yield of nearly 10%, the stock looks attractive at this level. The risk/reward ratio looks positive for the stock here. Although I don't see Nokia reporting a good quarter or raising guidance. Most analysts have written off Nokia's third quarter as a weak one, without the new Lumia models to help compensate for a drop in sales of older models with running its legacy Symbian software. According to a recent report by Reuters, Swedbankanalyst Hakan Wranne, who has a "buy" rating on the stock said:
So we're looking at a sort of vacuum in Q3. In addition to that, you have the Symbian volumes coming down very rapidly.
On average, analysts forecast Nokia to post an underlying operating loss of 320 million euros ($414 million) from its handset business, according to a Reuters poll. I would avoid the stock ahead of earnings based on the current run in the stock.
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 any pullback based on earnings as a buying opportunity. The only one I wouldn't touch would be Southwest. I would go long Baker Hughes and Schlumberger into earnings. I would sell Microsoft and Nokia prior to earnings hoping to pick them up cheaper on the other side.
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.
Additional disclosure: 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.