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How to Play Earnings Season

January 19, 2013, 3:40 pm

For a stock junkie like me, quarterly earnings seasons are times when I can be like a kid in a candy store. You can analyze stocks up, down, left and right, but it always comes back to how much money a company is making, and even more importantly, how much it is likely to make in the future.

In addition to releasing actual numbers—sales, earnings, costs, debt, etc.—most companies also hold conference calls when management discusses the results, growth initiatives, expectations for the future, and more.

The result is a sea of information about how companies are doing. As investors, we want to find the oysters with the valuable pearls inside and avoid the ones that are empty.

Take Goldman Sachs (GS), for example. They reported January 16, and I was looking for a strong report thanks to narrowing credit spreads that I expected to result in improved fixed income operations. GS did in fact blow past expectations, earning $5.60 per share when analysts were looking for $3.78, and the stock gained 4% the next day. (We leveraged our returns in High Octane Trader by buying call options the day before the report and selling them the next day for quick profits of 15.5%).

On the flipside, I expected Citigroup (C) to start to struggle with their earnings, which have grown as the company released funds it set aside to cover potential bad loans. That’s not a sustainable way to grow earnings, and Citigroup’s earnings of $0.69 a share badly missed analysts’ estimates for $0.96. (Again, we leveraged our returns in High Octane Stocks with put options, pocketing nearly 35% profits a week).
There are still a ton of reports to come, so let me share a few companies with you that I believe are good buys because of their earnings reports:

  1. Check Point Software (CHKP) will be announcing its fourth-quarter earnings report January 23. The valuation for the enterprise security software maker is very cheap since the market is giving too much credit to the competition (the Street is generally bullish on Palo Alto Networks). However, Checkpoint is very entrenched with their customer base, and displacing them is harder than the market believes.
  2. Microsoft Corporation (MSFT) will release its earnings report January 24. I know that many investors have already written off MSFT because of how poorly Windows did, but I wouldn’t be so quick to jump on the bandwagon. There’s a good chance we’ll see strong demand for the company’s enterprise software, which now brings in more revenues than Windows. Plus, the stock is incredibly cheap right now, trading at less than 10x this year’s earnings with net cash on the balance sheet of $8 per share. I could see a nice 5% pop on a good report.

Avoiding stocks that take a hit after earnings is just as important as picking the winners, and one big company you should beware of is Yahoo (YHOO). They will be reporting January 28, and while I expect results to be roughly in line with what analysts expect, I believe investors will focus more on guidance for 2013, management’s strategy for driving growth and controlling costs, the balance sheet assets, and the ongoing buyback. Unfortunately, even with the buzz surrounding new CEO Marissa Mayer, all of the headcount reduction, strategic investment, reorganization of the sales organization, are not likely enough to compensate for the headwinds in the core business.

I just talked about various “winners” and “losers” for the season on Bloomberg TV, and you can see what I had to say in the video below (please note: my segment appears two minutes into the video).

Hilary Kamer interview

More and more companies will be announcing earnings over the next few weeks, so I expect things to be pretty crazy on Wall Street. I will be watching Checkpoint and Microsoft very closely, but I think that these stocks are in good position to bounce after releasing results.

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