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Earnings Trades for the Week - 9630 views
MINNEAPOLIS (Stockpickr) -- Last week was a good week to be long stocks. The market recovered significant ground during the week, with the S&P 500 ending up 2.7%. Ignoring external factors such as Japan and Libya, investors instead chose to focus on the positives in the U.S. economy.
Heading into the week, expecting a recovery rally helped influence
my earnings trades. For the first time in a while, all three of my picks were on the long side. Two of them were winners, while the third gave up ground gained earlier in the week.
It was nice to be on the winning side of things, even if the gains were minimal. We started things off with a nice report from Dollar General (DG). The discount retailer was poised for strong earnings growth thanks to an economy that favors thrift. We may still be spending, but we are spending in different ways.
The earnings beat at Dollar General resulted in a gain of 3% for those trading the stock in advance of earnings.
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Sonic (SONC) was ripe for a big move higher. All that it needed was a spark from a positive earnings report. Instead, the company offered mixed results -- but it was still enough to send shares higher.
Sonic bested estimates thanks to the paying down of debt. On an adjusted basis, Sonic missed by a penny. The rally in the overall market had investors looking at the bright side with Sonic. Less debt should bode well for the future. Traders bid up shares slightly after the report.
The loser last week was H.B. Fuller (FUL). The specialty chemical maker missed estimates by a wide margin. More problematic was the admission that higher input costs hurt profit margins. The planned response will be to raise prices. We shall see if that plan sticks (pun intended for this adhesive maker).
The good news for traders is that the news came at the end of a positive week for stocks. Fuller moved higher in the early part of the week. The stock did gap lower on the news, but most of the losses were recent gains. No harm, no foul.
Add it all up and the net of the three trades was positive. Earnings season is in a bit of a lull as we wait for the second quarter to end. That said, there are always opportunities to trade.
Here are a few names to consider for this week.
Talk about an industry in full retreat. The online education space has been decimated by regulatory concerns and enrollment questions. One small bright spot for the industry is a job market that is far from fully employed.
Workers are interested in improving their resumes, and online education offers a way to do that. Perhaps there is hope, then, for future enrollment at these institutions. On Tuesday we will get a read on enrollment and operating performance from for-profit educator Apollo Group (APOL).
Since January 2009 when Apollo traded for as high as $90, it has been a tough go of it for the stock. On Nov. 30, 2010, Apollo bottomed at $34 per share and has only slightly recovered to today's price of around $43 per share.
For the current reporting period ended Feb. 28, analysts expect Apollo to post a profit of 69 cents per share. Interestingly, in a year of depreciation for the stock, Apollo has actually beaten estimates over the last four quarters. In the last period, the company beat estimates by 28 cents per share.
For the full year, analysts expect Apollo to make $4.62 a share. That number decreases to $4.28 a share in the following. That shrinkage is what troubles investors even though the stock trades for 11 times 2011 estimated earnings. This company is in the process of bottoming out, and predicting where it goes from here is difficult.
With so much skepticism in the stock, the stage is set for a nice rally with an earnings beat. Given its pattern of beating earnings over the last year, I would expect Apollo to do so again. I would be long the stock heading into the report.
A recent report stated that 50% of economists, real estate professionals and investment gurus expect a double dip in housing prices. One wonders how much lower this already-beaten-down sector can go. After numerous false starts, homebuilding appears ready for another slide.
Homebuilding stocks have rallied nicely over the last year. Ever optimistic investors appear to be willing to look past the bad news and instead focus on what must be pent up demand for new product.
These stocks have to move higher eventually, right? Well, not so fast. Many stocks in the group are priced above book value. If there is a double dip, book value is likely to slip, making these stocks more expensive. The group is poised for a pullback.
Within that backdrop we get Lennar (LEN) reporting earnings on Tuesday. The large homebuilder, now trading near a two-year peak at $20 per share, is expected to post a loss of 5 cents per share in the period ending in February 2011. That would match the 4-cent loss from the year prior.
Given that winter is a tough period for homebuilders, the loss is no surprise. Analysts are quite optimistic about Lennar’s future. For the full year ending in November 2011, the company is expected to make a profit of 64 cents per share. For the next year, that profit estimate jumps to $1.24 per share.
It is that growth that has investors willing to pay more than 1.4 times book value for this stock today. The possibility of a double dip in housing does not appear to be priced into the equation by investors or analysts. My expectation is that Lennar begins setting the table for a double dip with the current report.
I would play this one short going into the report. The upside looks limited given current valuation. If they beat the risk of loss here should be low.
Fertilizer maker Mosiac (MOS) is one of my favorite stocks at the moment. I named the company to my top 10 stocks list for 2011 back in December, and my expectation for this name has only increased since that time. Thus far, the stock is up a modest 4% for 2011. I believe there is much more growth ahead for this name.
On Wednesday, Mosaic reports earnings for the period ended Feb. 28. Analysts are expecting the company to report a profit of $1.07 per share, more than double the year-ago period's profit. Based on that alone, one would think shares would be worth double were they were a year ago, but that is not the case.
Holding shares back this year was the news that Cargill would be liquidating its entire Mosaic position in a move meant to raise cash for the large privately held company. The sale had nothing to do with the value of Mosaic, but the move spooked some investors.
That impact has reduced Mosaic’s valuation and provides a trading opportunity for investors long the stock. Wall Street expects Mosaic to make $4.13 a share in the fiscal year ending in May 2011 and $5.29 a share in the following year. Investors can buy that 28% growth for 15 times 2012 earnings estimates.
The trigger for any moves higher is likely to come from earnings reports, and that is what I am expecting with the current report. I would be on the long side of this trade in advance of the news on Wednesday. Look for a solid report and a subsequent pop in the stock.
Mosaic showed up on a recent list of five agriculture stocks that analysts love.
To see these stocks in action, check out the 3 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.