Stocks Worth Buying Before Earnings Week 2: Jan. 23-27

by: Brian Nichols

Last week did not turn out the way that I expected; but despite the loss we can still take away valuable lessons that can be used when playing earnings for the remainder of this season. I had said in the previous article, which was Week One of playing earnings with an initial amount of $20,000, that it should be used as a way to judge future earnings. Therefore, I purchased stocks that I believed presented the best opportunity for gains based on previous performance and its current positions. I spent the majority of my $20,000 on shares of Google (NASDAQ:GOOG), which I believed was a near guaranteed 5% gain based on its past performance. However, I was wrong, and ended up losing nearly $800 on the trade because of it being such a large position. But, I keep reminding myself, this is a marathon not a sprint, and there are going to be bad weeks, and stocks that don't perform to expectations. You just have to move on to the next week and try to learn from the experience and become a better investor.

Company Ticker Cost Buy Sell Gain/Loss
Google (GOOG) $12,520 $626 $588 ($760)
eBay EBAY $3,010 $30.10 $31.85 $185
American Express AXP $4,008 $50.12 $50 ($8)
$19,538 ($583)

After one week of buying stocks before earnings, my initial investment of $20,000 has declined to $19,417. I had originally planned on spending the entire $20,000 but luckily my online broker did not purchase the additional share of GOOG with my limit order. Therefore, I spent slightly less in week one, and had a bank of nearly $500. But on this particular week my purchase prices were good, and I know that my losses could have been more significant.

Every week during earnings season I try and take what worked and use a failure as an opportunity to learn. After having time to reflect on week one I have decided that I will no longer invest such a large sum of my balance on one stock, regardless of its likelihood of gains based on previous performance. This week I will be purchasing 5 stocks, and I believe that these selections will perform well enough to return large gains, which will make it easy to forget about week one. But like I said, I will avoid large purchases of single stocks and I will spend approximately $3,900 on each of the five stocks, which is split equally.

If Google would have performed better then there's a good chance that I would be investing more than half of my earnings money into shares of Apple (NASDAQ:AAPL), before the company reports earnings on Tuesday. However, because of my lesson learned from GOOG I will stick to my new plan and spend just $3,900 on a stock that has very high expectations. Analysts are expecting the tech giant to post more than $10 per share, which is a 40% premium over its most recent quarter. Some are skeptical because of its most recent performance, but what many people seem to forget is that AAPL posted an EPS of 7.05 during its last quarter without having any new products. This upcoming report will reflect earnings from a quarter that debuted the iPhone 4S, which was the fastest selling device of the iPhone series. Therefore, I believe the rapid sales of the 4S along with cheaper prices for its older versions will create significantly higher earnings and Apple will easily beat expectations and trade higher.

McDonald's (NYSE:MCD) will also be reporting earnings on Tuesday and most believe the company will exceed its expectations of $1.29 per share. MCD has posted a three month gain of 14% as a result of strong monthly sales and global expansion that has been quite successful. The company has several catalysts for future growth and has done remarkably well at attracting a larger customer base with its McCafe service and has done a good job at growing throughout the globe by incorporating various cultures into its food while keeping its brand. Overall, I think this stock still has plenty of room for growth and because it's met or exceeded expectations since Q1 of 2008 I believe investors can go ahead and count on the 3% gain that shares of MCD will provide after announcing earnings.

Since October, Caterpillar (NYSE:CAT) has posted gains of 50% and I still think it's undervalued. The stock is currently trading near resistance and it will be tough for the stock to breakthrough with expectations being so high, at $1.73 a share. However, I believe it's likely that this stock will breakthrough its resistance and trade much higher after announcing earnings that reflect continued growth of 40% year-over-year. The company will announce earnings on Thursday and I anticipate significant gains in the days prior to earnings as investors prepare for strong results, therefore it would be wise to load up on shares which will better prepare you for any possible surprises following earnings.

Netflix (NASDAQ:NFLX) is my wild card of the bunch, and will announce earnings on Thursday with an expected EPS of $0.55. For the first time in many years Netflix is expected to post lower earnings year-over-year and I believe that expectations are now low enough for the stock to post gains. The main concerns of investors will be the company's rising costs and its total number of subscribers, which include the number of subscribers who use both services. The company's costs are expected to be cut and because of a 50% gain YTD I believe that optimism is present within this stock and that it could very well trend higher if low expectations are met.

Tempur-Pedic (NYSE:TPX) is my under-the-radar stock of the week, but I expect the company to continue its trend of beating expectations for a 9th straight quarter. TPX has come a long way since 2009 with a gain of 700%, however its stock has stalled over the last 6 months as a result of increased pessimism within the market. During its last quarter the company improved margins, grew revenue by 30%, and posted earnings growth of 40% but still traded lower with the market. Analysts are expecting the company to post an EPS of $0.82, which would be lower than its most recent quarter. I find this to be encouraging because this company has a long history of higher earnings as the year progresses. Therefore I am buying this stock and I believe it will continue its trend of quarter-over-quarter growth which will easily exceed expectations which should trend higher assuming their are no surprises from Europe.

In week 2 my goal is to be balanced and safe after the disappointing results from GOOG affected my balance. I feel that TPX, AAPL, and MCD are all slam dunks; CAT has high expectations but is growing remarkably fast; and their is a lot of recent optimism surrounding NFLX which should lead to gains if the company shows any signs of promise. The only factor that bothers me as we head into week two is Europe. So far we have ignored the headlines from Europe and have traded higher. But as we now trade at 6 month highs I fear that any bad news, or failed negotiations in Greece, could result in loss. Greece will probably control the trend of the market in week two, therefore keep you eyes open and be sure to factor the potential global developments as several large companies announce earnings during this upcoming week.

Disclosure: I am long AAPL, MCD, CAT, NFLX, TPX.

Additional disclosure: All earnings expectations and previous results, along with dates, were obtained from CNBC.