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How to Trade This Week's Earnings - 6191 views
The earnings release calendaris sparse, with only one or two names to consider trading. If you absolutely must trade stocks this week, I have a few ideas. No matter what time of year, there are stocks on the move.
Before I make my suggestions, let’s review last week’s earnings trades. After a rough go of it the week before with a disappointing report from Best Buy (BBY), we are back on the right side of things with two big winners.
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Walgreen (WAG) did the most to impress. The company reported a profit in the quarter ending Nov. 30 of 62 cents a share. Analysts were anticipating a profit of 54 cents. The big profit jump was fueled by gross margin gains and fewer promotional expenses.
As I mentioned last week, investors would be attracted to this normally defensive name because of the growth potential of earnings. I was surprised by the strength of the report, as were others. Shares of Walgreen jumped more than 7% on the news and settled for the day up over 6%.
Over at Nike (NKE), the profit report was not enough to hold up its lofty shares. Although the company beat expectations, shares were pummeled after the company stated that it would see higher transportation and labor costs negatively impacting margins.
Interestingly, this is the first mention of the dreaded higher transportation costs. Investors and traders alike should take note. I have been expecting companies to begin mentioning higher transportation costs thanks to the increase in fuel costs.
This could be the first of many such mentions in the future. Nike shares are down 6% on the news.
Finish Line (FINL) posted a winning number in its earnings report. The company made 8 cents per share, which was 3 cents better than analyst estimates. On the revenue side, the company hit $260 million in the period. Analysts were looking for revenue of $249 million.
So how does the market treat such fantastic operating performance? Of course, investors decide to sell the news, sending shares of Finish Line lower by some 6%. Sometimes the market makes absolutely no sense.
The culprit for Finish Line is the tie-in to Nike. Poor guidance at Nike negatively impacted the entire sports apparel sector. Given Finish Line’s report, I think the move lower is an opportunity for a quick recovery trade.
Now here are three trades for this last week of 2010.
One of the only real names to release earnings next week and thus perhaps to trade is Cal-Maine Foods (CALM). The very large food company that produces and distributes egg products to supermarkets and restaurants reports on Monday.
Analysts expect the company to post a profit of 72 cents per share. While it is quite difficult to trade defensive stocks due to the relative lack of volatility, traders might find an opportunity with Ca-Maine.
Over the last year, the company has reported results that wildly missed expectations. In each of the last four quarters the company has bested estimates by as much as 24 cents per share.
Will the company see another strong report and more importantly will the stock move on the news. Sticking to the theme of rising input costs, I’m expecting a miss for Cal-Maine this period. The winning streak is over.
As for how the stock will trade if the company misses, I expect shares to move lower. Shares are up more than 25% in the last two months. If results are worse than expected look for the market to give back some of those gains.
There is absolutely no reason why this stock is trading lower after its earnings result. One problem at this time of year is that reduced trading volume can adversely impact a stock. In this case, selling of Finish Line in the wake of weak guidance at Nike is too much to overcome.
This is an example of the market being inefficient, in my opinion. As mentioned above, Finish Line beat on both the revenue and profit line by a wide margin. Estimates for the future are likely to increase and higher input costs should not affect retail sales.
I would use the selling as an opportunity to buy the stock this week. Look for a bounce back rally to go above and beyond the 6% losses incurred last Wednesday. Take advantage of low trading volume and vacationing traders by going long this stock.
Shares of J.C. Penney (JCP) have nearly doubled in just a few months of trading. I expect the trend momentum to continue as investors cheer a successful close to this year’s holiday season. More importantly look for strong sales in the days after Christmas.
Have you been in a J.C. Penney lately? It is not your grandma's J.C. Penney. Its inventory mix is quite impressive, and its prices are fantastically low. The company seems to have the right formula and deserves a higher valuation.
At current prices, shares trade for 25 times trailing earnings but only 19 times forward earnings. Such reduction is due to J.C. Penney's being expected to deliver close to 30% earnings growth.
Earnings growth is likely to be stronger given the increase in sales during the holiday season. J.C. Penney is back and worthy of a speculative trade during a slow week. If you do trade J.C. Penney, keep a stop loss on this suggested long position.
To see these stocks in action, check out my earnings stocks of the week 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.