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3 Earnings Trades for the Week - 10641 views
MINNEAPOLIS (Stockpickr) -- The market is indeed taking a pause in the early-going of trading this week. That said, there are a number of strong subplots that suggest a very strong underlying market. Perhaps we have finally moved out of the fog of fear created by the recession and financial crisis.
Stocks in general may be a bit weak this week, but individual stories have plenty of bullish gusto. For example, Dell (DELL) reported results that flew by analyst estimates. Predictions of the demise of the personal computer appear to be over done. The stock is trading higher on the news.
My suggested earnings trades are doing well too. Aaron’s (AAN) released a strong earnings number that triggered an immediate move of more than 12% in the aftermarket. Earlier in the session, shares of Stifel Financial (SF) jumped nearly 10% thanks to its own positive report.
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On Wednesday, Abercrombie (ANF) beat estimates, and its stock moved higher in the opening hours of trading. Over at P.F. Chang's (PFCB), shares were up slightly after a good earnings report and in-line guidance for 2011.
As I have said ad nauseam, stocks are really moving wildly after reporting results. The environment is ripe for big trading profits in a short period of time. Over the last weekend, I went back and calculated just how well traders were doing simply following my earnings trades that I began chronicling here in mid-November.
The results are astounding. I’ve made 54 recommendations in total. There have been 30 winners, 15 losers and nine picks that traded sideways. Some of the winners have been huge, making traders more than 10% in a day of work. A trader following every recommendation with a starting portfolio of $40,000 would have approximately $62,000 today.
The earnings parade continues this week with several companies reporting results. Many of these stocks will move 5% to 10% or more depending on the results. A rational analysis in advance of the news can be a very powerful weapon for any trader.
Here are a few more trades for this week.
The tax man cometh and with him, deadlines to file taxes. Helping individuals and small businesses with their filing obligations is tax software maker Intuit (INTU). Intuit is also a go-to provider of accounting and bookkeeping software for small businesses.
I’ve said many times that small businesses do very well at the beginning of a new economic cycle. As such, those that provide services to the small business owner should do well too. That should bode well for Intuit when it announces its earnings report on Thursday.
Analysts expect the company to make 32 cents a share for the quarter ended Jan. 31. For the year ending July 2011, Wall Street expects the company to post a profit of $2.41 a share. In the following year, the estimate is for a profit of $2.75 a share. That equates to a growth rate of 14%.
After three quarters of beating estimates by a wide margin, Intuit merely met estimates in its previously reported quarter. From a valuation perspective, shares trade for 21 times 2011 estimates and 18 times the 2012 number.
Over the last three months, shares of Intuit have gained some 10% riding the wave of the current bull market. During the same period, analyst estimates for the quarter have been shrinking.
I would trade expecting a beat of estimates. If so the stock will gain. As always be prepared to be disappointed forcing a quick closure of the trade if the company misses the number.
Red Robin Gourmet Burgers
Prior to the recession and financial crisis, Red Robin Gourmet Burgers (RRGB) was one hot company. Investors fell in love with the product and growth prospects for this casual diner. Unfortunately, the luster is off this stock, and shares lost more than half their value since peaking late 2007.
Interestingly, one would think the company would have performed well during the recession given the value proposition of its menu. One can only blame poor execution for the lack of success during the period.
Over the last year, the company has missed Wall Street estimates by a wide margin. Could the stage be set for a surprise to the upside? Analysts expect the company to make 5 cents a share for the most recent quarter ended Dec. 31, 2010. That prediction has been steady over the last 90 days.
For the full year the company is set to make 57 cents per share. For 2011 the expectation is for a profit of 81 cents per share. That represents a growth rate of 42% that investors can buy today for 26 times 2011 estimated earnings.
It would be difficult to trade this stock long in advance of earnings simply based on the misses in each of the last four quarters. That said, the consumer has been relatively strong, and we have seen other casual dining restaurants such as Buffalo Wild Wings (BWLD) report fantastic numbers.
Clearly Wall Street wants to believe in this company. I think you should as well. Breaking that trend of negative performance could send shares higher. A miss is likely to be met with a yawn. I would trade long in advance of earnings.
The for-profit education space has been pummeled over the last six months. Regulatory spotlight combined with changes in the student loan market have negatively impacted enrollment. An improving economy has not helped matters.
One could certainly argue that investors have priced in the worst of it by slicing some 50% off the sector en masse. Not one stock has been spared. If we have seen the worst of it, then how do we explain the 17% slicing of value after Capella Education’s (CPLA) earnings report?
It really does not bode well for Strayer (STRA), which posts results on Thursday. This one is easy: Bet against the company because we have not seen the worst of it.
Analysts expect Strayer to make a profit of $2.65 a share for the quarter ended Dec. 31, 2010. Ultimately the numbers matter little in the current environment. Investors will be keenly focused on future guidance. That is where traders should key on what happened with Capella.
The industry is under attack. I would sell this stock short in advance of earnings. I expect guidance to be sufficiently negative to produce a 10% or more decline in the stock.
To see these stocks in action, check out the Earnings Trades portfolio.
-- Written by Jamie Dlugosch in Minneapolis.
At the time of publication, author had no positions in stocks mentioned.
Jamie Dlugosch is a founder and contributor to MainStreet Investor and MainStreet Accredited Investor. Formerly, he was president and CEO of Al Frank Asset Management. He has contributed editorially to The Rational Investor, The Prudent Speculator, Penny Stock Winners and InvestorPlace Media.