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Moves To Make Now In A Bleak Earnings Season

|Includes: Apple Inc. (AAPL), FB, NFLX

It has been a less than stellar earnings season to date. Even with hammered down expectations, many major companies including but not limited to Starbucks (NASDAQ:SBUX) and Apple (NASDAQ:AAPL) have either missed estimates, given negative outlooks, or both in the face of uncertain and deteriorating macroeconomic conditions. There have been bright spots such as Whole Foods Market (WFM) and IBM (NYSE:IBM), but for the most part slowing growth in the worldwide economy has put a damper on the entire earnings season. It is not difficult to become lost amidst earnings which makes concentrating on a handful of stocks of the essence. Playing these stocks after earnings can be a great opportunity to buy or to cut losses. The moves that pop out most are to sell both Netflix (NASDAQ:NFLX) and Facebook (NASDAQ:FB), and to buy Apple.

Netflix joined Chipotle Mexican Grill (NYSE:CMG) this week in losing around a quarter of its stock value following a sub-par outlook and meager earnings. Despite its massive plunge causing it to hover near its 52-week low, Netflix still trades at high multiples and is overvalued with a P/E of 32.95. Its quarterly earnings and revenue were not as terrible as the selloff may have led some to believe, it was the outlook that caused the drop. Unfortunately for Netflix, a negative outlook has more impact and importance than a flat quarter does. The company warned that meeting its goal of 7 million new streaming subscribers in the United States will be difficult, and with the way that things have been going for the company, it would be a huge shock if they actually reached that number.

Netflix has also had trouble negotiating with studios such as Starz as they call for the company to pay more for its content. This will either lead to less of a selection available on Netflix or a higher price to be payed which would harm their already treading-water profitability. Both outcomes of this problem bode poorly for the company. Next, the company announced that it would be expanding to Western Europe past Ireland and the United Kingdom. This seems to be a death wish, Europe is the last place that a company should want to initiate business operations right now. It is naive to think that a subscription to Netflix would even cross the mind of consumers on the continent as they worry about the ability of the Eurozone to survive. Again, the second quarter was not horrendous, but the outlook and decision making is. The stock price of Netflix may be cheap in regards to its 52-week range but it still trades at high multiples and has an overwhelmingly pessimistic outlook, which makes now the time to cut losses and sell.

Setting new all-time lows on Friday after earnings is not-so-beloved Facebook. Before Facebook went public, I wrote an article covering a multitude of reasons why investors should steer clear of the stock (can be found here: and they are all still prevalent today. Facebook plunged over 10% on Friday after its first earnings call to $23.71 a share. This is the lowest level that the stock has dropped to since it went public, but it still has a P/E of 59.75 which shows that it is still trading at multiples that are simply too high to maintain.

Like Netflix, Facebook reported an on-par quarter with a negative outlook. The company matched EPS estimates of $0.12 a share and was largely in-line with revenue. It was also reported that the trend of losing visitors did reverse and turn positive from the previous month, but visitation is still at 159.8 million - down from 166 million in November 2011. This is both positive and negative; the reversal is good for now but the fact that usage has dropped at all is not a good sign especially when considering the enormity of trends on the internet. The obvious example of this is MySpace. I am not implying that Facebook is necessarily the next MySpace, but losing the "cool factor" is one of the biggest worries surrounding Facebook and declining usage numbers do not help to appease those qualms.

As stated in my previous article on Facebook, there are various issues confronting it including privacy problems, valuations, user growth and consistent usage, mobile monetization, and most importantly finding a balance to keep both investors and users satisfied. None of these troubles have subsided and will continue to plague the stock and the company. As long as Facebook fails to find ways to profit from the mobile market, there is no positive catalyst for it especially with its high multiple. Facebook was an attractive short, but it has since fallen heavily after Zynga's (NASDAQ:ZNGA) earnings and its own which has made it too risky as of now. As a result, the best thing to do with Facebook is to cut losses if a long position was held, buy to cover if it was shorted, or to avoid if no position is held (the same mentality should be applied to Netflix).

I was once bearish on Apple, and even wrote my first article with that opinion serving as the premise, but unlike Facebook many of my fears have since settled. I argued that Apple's growth was impossible to maintain in the future and that the trajectory of the stock would eventually take a hit. After its latest earnings report I think that it took just that hit. Apple missed for only the second time in 39 quarters, earning $9.32 per share missing expectations of $10.37 a share. Profits were down 94% from the near record-breaking numbers in Q1, but still rose 20.7% year over year. Although not the growth that has become expected from Apple, the number is still impressive. This may be a signal that Apple's growth is slowing down a bit, but that does not restrict it from being a good buy.

It is clear that consumers are waiting for the iPhone 5 which leaves no reason to believe that it will not be a home run. What happened in this quarter should be no different than what happened in the third quarter of last year. Apple missed on sales but more than overcompensated in the next quarter with the release of the iPhone 4S. The same pattern will happen with the iPhone 5 (maybe the release of a smaller iPad, as well) and the stock will continue its upward trend. If the iPhone 5 disappoints, it may be time to unload Apple shares but there is no evidence that would foreshadow such an event. I have been bearish on Apple in the past, but after falling 5% on earnings and trading at a very fair PE of 13.69, I am bullish on the company and strongly believe that it is a good buy at current levels.

So far, the only reason why earnings results have not been unexpectedly bad is because expectations were already so low. Omitting the outperforming companies, poor quarterly reports and/or outlooks have created some windows of opportunity, but just as often have brought about the time to perform the undesirable but ultimately beneficial action of selling to cut losses. Netflix and Facebook are two companies that announced quarters in-line with what analysts were expecting but provided weak outlooks and remain trading at high multiples, making each a strong sell. On the other hand, Apple's earnings miss and 5% drop (although some of that loss was recovered on Friday it is still at a price suitable for purchase) presented an opportunity to add to a long position or initiate a new one. The slowing macro climate has admittedly hurt most companies and put a hurt on quarterly earnings and outlooks alike. However, now is the time to capitalize on existing opportunities and get rid of stocks with less than enticing outlooks.

Disclosure: I am long WFM.

Additional disclosure: Sold shares of SBUX on Friday.