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4 Earnings Trades for the Week - 11105 views
MINNEAPOLIS (Stockpickr) -- This market just won’t quit. The straight line higher from the lows of 2009 continues. Not even the crossing of important psychological thresholds can slow the ascent.
A rational person knows that at some point stocks are due for a breather. While it is perfectly normal to see stocks rally as we emerge from a deep recession, stocks at some point must step back. Economic growth current or projected simply will not support perpetual stock appreciation.
When a correction or pause occurs is anyone’s guess. It is impossible to predict. In fact, guess wrong and you could miss out on wonderful gains that the market is now providing to those on the long side.
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I call the current state a buy-and-hold trap. The market wants you to own stocks whether you like it or not. Just as it sucks you in, stocks are likely to fall. The lure of buy-and-hold is that you won’t miss out on upside moves. The fallacy is that when you buy and hold you most certainly won’t miss out when stocks go south.
Instead of playing the waiting game with buy-and-hold, trading stocks on a case-by-case basis allows for profits to be made irrespective of the global markets. One of the best triggers for trading stocks is earnings reports.
This week we have another wide swath of companies reporting results. Here are a few stocks to watch.
Furniture and home furnishing leasing company Aaron's (AAN) releases results on Feb. 15. The company has been working hard to recover from the housing collapse and struggling economy. Shares have doubled in value since bottoming in 2009, thanks to an improving profit picture.
Analysts expect the company to make 34 cents in the quarter ended Dec. 31, 2010. Over the last year the company has been pretty consistent with its results, beating expectations on average by a penny or two.
Will a stronger consumer result in the company beating expectations? Estimates have held steady over the last 90 days. It would appear that analyst may have been lulled to sleep by the company.
I would expect the company to beat estimates when it releases results. With shares trading for only 13 times 2011 estimates of $1.61 per share, the stock should move significantly higher with a beat. A beat by more than a few pennies will have this stock going up by more than 10%.
I would trade on the long side in advance of earnings.
Abercrombie & Fitch
Like many retailers Abercrombie & Fitch (ANF) has been enjoying a renaissance over the last year or so. Crowded stores and a stronger consumer have helped the company increase profits and with those profits shares have Abercrombie have nearly doubled in value over the last six months.
Although the stock has corrected by about $10 in early January, the stock has since returned to an upward trajectory. Recent moves have been supported by retail sales in January that were better than expected.
When the company releases earnings on Wednesday, investors will get a taste of just how strong the consumer really is. Analysts expect the company to post a profit of $1.32 per share in the period ended Jan. 31. That number has been steadily rising over the last ninety days.
For the year ended on the same date, Abercrombie is expected to make $1.99 a share. Analysts have that number jumping 40% to $2.80 in 2012. Do current estimates properly reflect the strength of the company’s operating performance?
My suspicion is no. Typically analysts are naturally conservative in the early stages of an economic recovery. They may have raised estimates, but I don’t think they raised them far enough. The company has beaten expectations in each of the last four quarters.
That trend continues. Look for the stock to jump another 5% or more as a result.
Abercrombie was one of five Jefferies consumer stocks for 2011 with upside, and one of Goldman's 11 best consumer stocks for 2011.
Investors can ride the coattails of Buffalo Wild Wings strong quarterly results by trading P.F. Chang's (PFCB) in advance of its earnings report, due out on Wednesday. The casual dining space has been outperforming the rest of the market as consumers pack restaurants in the fourth quarter.
In the case of P.F. Chang's, much of the good news appears to be already priced into the stock. Shares trade for 24 times the $1.95 per share that analysts expect the company to make in the year ended Dec. 31. Estimates are for profits to grow by only 12% in 2012 dropping the earnings multiple to 22 times earnings.
That is a steep price to pay for a company that is only growing by 12%. When you consider that P.F. Chang's has missed estimates in two of the last four quarters, the rational trade would be to short the stock in advance of the current report.
The personal computer may be on the decline, but there is plenty of business for graphic chip maker Nvidia (NVDA) to capture in its place. The explosion of smart phones and tablet computers provide fertile ground for profits. Investors have taken notice.
Shares of Nvidia have jumped nearly three-fold since last fall, thanks in part to the growth in smart phones and tablet computers. Is there anything left on the table?
Analysts expect the company to make twenty one cents in the quarter ending January 31, 2011. That would result in the company making sixty two cents for the full year ending on the same date. For 2011 the estimate is for Nvidia to make $1 per share.
Investors can buy that 61% growth for just 24 times 2011 earnings. That is a steal considering the growth potential. With the smart phone revolution just beginning it is highly likely the company will exceed current estimates.
I expect the company to beat earnings when it reports results on Wednesday and the stock to jump as a result. I would be long the stock heading into earnings. A substantial beat has this stock going up 10% or more thereafter.
To see these stocks in action, check out the Earnings Trades portfolio.
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.