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3 Earnings Trades for the Week - 6762 views
MINNEAPOLIS (Stockpickr) -- Once again the market is showing its mettle. Faced with geopolitical risk and a market wanting to sell off, stocks have rallied in the early going of this week. The Dow and S&P 500 indices broke through key psychological barriers.
More incredible are the big moves in stocks that have announced earnings.
Companies releasing results are swinging 10% to 15% -- in some cases more. If you are trading based on pre-earnings analysis, you can make some fast money. Of course, you can also lose money, so let’s take a moment to review the play book -- or at least how I would go about things with this approach.
For starters, these trades are short-term and short-term only. Place the trades in advance of earnings and then sell during the first full day of trading after earnings are released. If you are on the wrong side of a trade, sell immediately using aftermarket trading to quickly exit a position.
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If you are on the right side of a trade, lock in your profits close to the end of the trading session. To be more exact, you can specify an exit point that is automatically triggered should the stock hit your stop price.
Stick to that plan and you should do pretty well. The volatility and the big moves on your winners will more than offset your losses. At the end of the day, you can make 5% to 10% per week, potentially doubling your money in less than three months.
This week we have made three winning trades and one loser. The first winner was Baidu (BIDU). The Chinese search engine
blew away analyst estimates and the stock jumped well over 10%.
Brightpoint (CELL) reported strong results, and the stock spiked more than 23% in afterhours trading.
The big loser in the group was Green Mountain Coffee (GMCR), which I recommended betting against. The company reported strong earnings and optimistic guidance for the future. The stock shot up more than 16% in the after-hours market.
Place a mythical $10,000 on each trade and you gross just over $3,400. Against the $40,000 at risk, and the return is a cool 9% to the upside.
These trades are so unbelievably powerful. Here are a
few more options to explore the remainder of the trading week.
It really has been amazing to watch momentum stocks trade in 2011. The volatility is through the roof. The judge, jury and executioner for these stocks are the earnings report. Beat the number and boom, add another 10% to the valuation. Miss the number and the reverse is true.
What will it be for hot stock, Coinstar (CSTR), slated to report earnings Thursday after the close? If Netflix (NFLX) is any guide, this is a stock to own heading into earnings season. Like Netflix, Coinstar is in the DVD delivery business. Its Redbox machines are now widely available and customers are using them in droves.
Shares of Coinstar were taken to the woodshed two weeks ago when the company sharply lowered its guidance for the fourth quarter. The stock lost more than 30% on that news, but it has rebounded slightly.
Analysts expect the company to make 68 cents a share in the period. Given the recent warning, the company should meet the number. What will be important is the outlook going forward.
Despite the reduced guidance, Wall Street is looking for this company to grow impressively in the coming year. Analysts expect Coinstar to finish 2010 with a profit of $2.03 a share, with that number growing to $2.83 a share in 2011.
That represents nearly 40% profit growth. With shares now trading for just 15 times the 2011 estimate, one could argue that shares of Coinstar are cheap. To the extent that there is any positive guidance for 2011, shares are likely to jump.
I would trade Coinstar on the long side in advance of the report.
Women’s fashion can be fickle. Bebe Stores (BEBE) had the wind at its back for a number of years before trends and buying patterns changed. The company has been struggling over the last five years, culminating in a very bad 2010. In a very strong year for most retailers, Bebe’s shares lost approximately half their value.
The company reports earnings on Feb. 3 for the quarter ended Dec. 31. Will it be more bad news for investors? Analysts expect the company to post a puny profit of two cents per share. Given that the company has operated at or near breakeven over the last year, those numbers should be easy to meet.
Ultimately the question for investors with this report will be the future. Wall Street sees the company making a modest 4 cents per share for the full year ending June 30, 2011. The good news for investors is in the 17-cents-per-share profit estimate for the following year.
As optimistic as that may be, shares of Bebe trade for some 33 times the 2012 estimate. That is quite expensive -- and wishful thinking if you ask me. Once a stock is in decline, it is difficult to stop the momentum downward. The risk here is that if the company fails to impress, share are likely to decompress further.
It is tough to be against the strong retail numbers of late 2010, but I would be with Bebe. Even a meet the number should be met with skepticism and selling by investors. This stock could lose 10% in a flash.
Money transfer company Moneygram (MGI), which reports earnings on Feb. 4, nearly collapsed during the financial crisis. After an impressive growth period, shares of the stock plunged on worries over solvency and accounting questions. Despite huge operating losses Moneygram’s stock has recovered since bottoming out at a buck a share in 2009.
Are the gains simply optimism run amok? Certainly its business model is impressive, but those losses cannot be ignored. Analysts expect the company to lose 35 cents per share during the fourth quarter. That would put the loss for the year ended Dec. 31 at $1.22 per share.
The market is rewarding performance, but it's not in much of a mood to reward companies losing money. More troubling for investors in Moneygram is the fact that the company missed estimates in the last two quarters.
A miss here and shares would likely sell off significantly. On the flip side are the impressive gains by other money-processing businesses. Visa (V) reported strong results, as did Western Union (WU). A strong consumer and more healthy global economy could boost Moneygram’s performance.
I would trade expecting as much and ignore the overall operating loss. If the results greatly exceed estimates, the sooner the company becomes profitable. On such a track, shares could double from current levels.
This stock is a trade as they report earnings and a possible longer term investment for those so inclined to take risk.
To see these stocks in action and for more stocks with upcoming earnings reports, 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.