Edgar Ambartsou...'s  Instablog

What really baffles me, is that even companies that are listed on NASDAQ are beginning to behave like OTC stocks, one of them being a micro cap such as Ocean Power Technologies Inc. (OPTT). Amateur investors get sucked into a surging price per share due to intense promotions, without really diving into fundamentals or growth prospects.

Recently a company was mentioned by National Inflation Association, a website created to scare novice investors that doomsday is coming due to hyperinflation. In reality its a marketing scheme to gather subscribers and then promote small cap companies.

Broadvision, Inc. (BVSN) surged more than 400% since December, after thousands of subscribers were bombarded with e-mails stating the company was the greatest thing since sliced bread. The only great thing about this $146 million e-commerce company is its assets, and the fact that it carries no long term debt. But truth of the matter is that it doesn't have any net income either.

Company has been burning through cash and propping up their losses by showing positive cash flow from their investing activities (which has also been falling). Despite a stable revenue stream quarter over quarter, Broadvision's net loss increased from a loss of $1.64 million to $1.81 million in the past few consecutive quarters.

Besides my humble opinion, other well known short sellers have also noticed the hype. Tim Sykes, a well known millionaire and hedge fund mogul who turned $12,000 into $2,000,000 trading penny stocks, knows an opportunity when he sees one. He has been making thousands a week shorting BVSN, realizing its 400% surge was not warranted to begin with. BVSN's short ratio rose from prior month's 131,000 to currently 279,000.

If an investor is seeking for a turnaround story with low debt that is improving its income year over year, then Crocs (CROX) or Fastenal Co. (FAST) would definitely present better opportunities than the aformentioned.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Jim Cramer always preaches how an investor should purchase equities or add to existing positions after the earnings release, not before.  Very true, however, if you are a short term trader, a strategy I found useful is to trade in and out of a stock 2-4 business days before the earnings release.  Why not make a short term profit before deciding to go in long term after the earnings report date?

At times, the "prior to earnings" volume increases and the PPS move is pretty indicative as to how the earnings will turnout, but not always. I can't count how many times there was a major sell-off few days prior to earnings, then company beats analyst estimates and bears scatter into the woods before the opening bell the next day.  Opposite also holds true, a perfect example would be Apple's (AAPL) last quarter earnings results.  From October 13th to October 14th Apple rose from $408 to $422 a share with subsequent 5 million shares per day increase of volume accumulation before tumbling after missed earnings.  I did make a gain on that strategy trade, but went against my discipline and held some shares through earnings day by putting all my faith on the tech giant's consecutive and flawless earnings history.  Enough about me, let us take a look at some names that report this week and the possible gain that one could have captured in trading prior to earnings. 

Company	Average Volume	Entry Date/Price	Exit Date/Price	Gain	Earnings Date
Dollar General (DG)	1,310,000	Nov. 29 $39.01	Dec. 1 $40.64	4.17%	Dec. 5
Analogic Corp. (ALOG)	65,742	Nov. 30 $52.29	Dec. 2 $56.64	8.32%	Dec. 8
Bank of Montreal (BMO)	906,525	Nov. 29 $55.20	Nov.30 $58.76	6.45%	Dec. 6
Casey's General Stores (CASY)	233,071	Nov. 30 $51.04	Dec. 1 $53.99	5.78%	Dec. 7
Auto Zone Inc. (AZO)	269,562	Nov. 29 $323.05	Dec. 1 $334.22	3.46%	Dec. 6
SAIC, Inc. (SAI)	2,120,000	Nov. 30 $11.77	Dec. 1 $12.14	3.14%	Dec. 6

Conclusion

Nobody knows how the earnings will turn out, but when the insiders and investors consensus cheer with optimism prior to reporting, you may detect that in robust volume and change in PPS, as well as accumulation/distribution line.  Scan stocks that report earnings in a couple of days from now and watch them like a hawk until earnings day to get a good practice on the strategy, but remember to stay on sidelines during that conference call.  



Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.