3 Earnings Trades for a Gloomy Market

by Jamie Dlugosch | November 21, 2011 3:31 pm

It looks like the market forgot to take its Prozac. Investors are in a gloomy mood that has translated into steep sell-off. The surrender of the congressional supercommittee[1] is the latest trigger for anxiety. The major indexes were all down well over 2% in Monday trading.

The year-end holidays are usually a good time to own stocks because investors tend to be more hopeful during the season. But this year might be different for all the obvious reasons: sovereign debt, economic softness and a lack of policies that support growth. It’s simply too hard to say where we go from here.

It’s difficult to find any strategy that can really work[2] in this market. Trading on technical indicators might be the closest thing to making a profit in this environment. Fundamentals and value don’t seem to matter. Growth stocks are a crapshoot with some flying high and some, like Netflix (NASDAQ:NFLX[3]) and Green Mountain (NASDAQ:GMCR[4]), crashing back to earth.

One way to eliminate the uncertainty is to trade stocks that are about to release earnings. In the immediate aftermath of an earnings reports stocks are more likely to trade based on actual fundamentals instead of some unrelated macro issue.

Do your homework, and you can find trading opportunities that offer the potential of sizable returns. One of my recent trades was a short of Salesforce.com (NYSE:CRM[5]). After it reported results, its shares fell by more than 10% — making the trade a big winner.

Forget about the gloominess of the market. Here are three trades of companies reporting earnings this week:

TiVo

The cable-TV digital recorder company reports earnings for the quarter ending Oct. 31 on Tuesday. TiVo (NASDAQ:TIVO[6]) has had a rough go of it over the last few years. The luster of being first in the market has long faded. Competition has destroyed its growth prospects, and investors have been fleeing.

What was left was patent litigation that showed signs of promise when a court ruled in TiVo’s favor in March of 2010. The victory was fleeting as an October court reversal sent shares lower. TiVo and EchoStar announced a $500 million settlement in early 2011. Certainly, the cash is nice, but what about ongoing operations?

The last year has been mixed for TiVo. It has exceeded estimates in the last two quarters, but prior to that it missed expectations. For the quarter ending Oct. 31, Wall Street expects the company to lose 23 cents per share. That’s a larger loss than analysts projected 90 days ago.

For the full year ending Jan. 31, 2012. analysts expect TiVo to make 54 cents per year. In the next fiscal year that profit estimate swings to a loss of 55 cents per share. At current prices, the stock trades for 18 times current fiscal year estimated earnings.

In this environment stocks with profits moving in reverse tend to get punished. This one is tricky because patent disputes are likely to mask ongoing operating concerns. With the next earnings report, the focus will be on operations for the short term. I would be short TiVo  in advance of earnings on Tuesday.

Campbell Soup

I recently wrote about Campbell Soup as a stock to own during a 2012 recession[7] should another downturn materialize next year. Today, the focus will be on Campbell’s (NYSE:CPB[8]) earnings. On Tuesday it  releases results for the quarter ending Oct. 31. With consumers looking to save money during a challenging economic environment, soup sales for Campbell should be better than expected.

The company has recovered from earnings results that missed expectations in the quarters ending late 2010. In each of the last two quarters, Campbell has beaten estimates solidly. Look for the same trend to continue with this report on Tuesday.

For the current period, analysts expect a profit of 79 cents per share, down slightly from an estimate of 81 cents ninety days ago. For the full year ending July 31, 2012, Wall Street is looking for a profit of $2.37 cents per share. That estimate  improves by 7% to $2.53 per share in the following fiscal year.

At current prices, Campbell trades for 14 times current fiscal year estimated earnings. That’s steep relative to growth, but keep in mind the company also pays a dividend yield of 3.4%. That has attracted income investors and lifted Campbell’s valuation.

The trend is for consumer budgets to shrink as income growth remains nonexistent and unemployment stays high. Expect Campbell to do better than forecast, further increasing its premium valuation. I would be long the stock in advance of earnings.

Guess?

Monday’s sell-off is creating a trading opportunity in shares of Guess? (NYSE:GES[9]). The upscale clothing retailer reports results for the quarter ending Oct. 31 on Wednesday. With the holidays approaching, this stock might get a double boost from optimistic investors hopeful for a strong selling season and a surprise earnings report.

Guess is also attractive when considering current valuation against expected future profit growth. Over the last four quarters, the company has exceeded Wall Street estimates. For the current quarter, analysts expect Guess to make 73 cents per share. That’s significantly lower than the 85 cents-per-share estimate of 90 days ago. For the full year ending Jan. 31, Guess is expected to make $3.30 per share. In the following year profits are anticipated to grow by 13% to $3.72 per share.

With the stock trading for only eight times current-year estimates, Guess shares should pop on Wednesday if earnings surprise to the upside. I would trade expecting such an outcome.

Endnotes:
  1. surrender of the congressional supercommittee: http://investorplace.com/2011/11/supercommittee-fails-investors-pay-the-price/
  2. strategy that can really work: http://investorplace.com/2011/11/2-pair-trades-for-an-absolute-return-strategy/
  3. NFLX: http://studio-5.financialcontent.com/investplace/quote?Symbol=NFLX
  4. GMCR: http://studio-5.financialcontent.com/investplace/quote?Symbol=GMCR
  5. CRM: http://studio-5.financialcontent.com/investplace/quote?Symbol=CRM
  6. TIVO: http://studio-5.financialcontent.com/investplace/quote?Symbol=TIVO
  7. Campbell Soup as a stock to own during a 2012 recession: http://investorplace.com/2011/11/3-stocks-that-will-weather-a-2012-recession/
  8. CPB: http://studio-5.financialcontent.com/investplace/quote?Symbol=CPB
  9. GES: http://studio-5.financialcontent.com/investplace/quote?Symbol=GES

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