HP Stock Play Is Lock of the Week

by Traders Reserve | May 22, 2012 1:30 pm

We laughed, we cried…

We made a ton of money!

With that so goes one of the more fantastical arbitrage opportunities I have seen in some time. While the market kept inching higher or treading water, the current below was choppier.

As such, we were able to identify stone-cold earnings trades that exploited companies reporting earnings results that generally disappointed investors and resulted in share prices falling at a significant clip.

This of course was a case-by-case event that was present thanks to a market that in the macro was overvalued. Now with multiple trading days to the downside, that arbitrage opportunity has dissipated.

Market Fizzles After Facebook

Last week was the icing on the cake as stocks failed to rally on the heels of the sensational Facebook (NASDAQ:FB[1]) initial public offering. In fact, some might say that event may be a signal for stocks to continue falling. We can only hope for such losses. The more the better and the greater the potential of our Stone-Cold Earnings Trade Lock of the Week.

Last week I recommended buying a put contract on Intuit (NASDAQ:INTU[2]). The software company reported middling results. Shares opened slightly higher, reached a peak by midday and then closed near the flat line by the end of the trading day.

This week’s search for the Stone-Cold Earnings Trade Lock of the Week switches over to the long side. With stocks sliding, valuations are down across the board. That lowers the bar for companies reporting earnings results.

The biggest arbitrage opportunity this week in my opinion is a technology company that is large, well known and now, thanks to the market downturn, is massively oversold. I expect this company to continue a trend of beating earnings estimates and with such news to see its stock bounce higher.

It’s a huge money-making opportunity.

Here are five companies reporting results this week, including my Stone-Cold Earnings Trade of the Week:

Analog Devices

The semiconductor company reports earnings results for the quarter ending April 30, 2012 on Tuesday after the market closes. Wall Street expects Analog Devices (NASDAQ:ADI[3]) to earn 51 cents per share in the period. That estimate is 3 cents per share lower than where the estimate stood 90 days ago. The company has missed expectations by a slight margin in each of the last three quarters. Shares of Analog Devices have dropped by 17% in the last year. Analysts expect profit growth of 24% from the current fiscal year ending Oct. 31, 2012 to the next. At current prices, shares trade for 16 times current fiscal year estimated earnings.

Take-Two Interactive

The gaming software company reports results for the quarter ending March 31, 2012 on Tuesday after the market closes. Wall Street expects Take-Two Interactive (NASDAQ:TTWO[4]) to lose 55 cents per share in the quarter. That estimate has held steady over the last 90 days. The company has exceeded estimates in three of the last four quarters. Shares of Take-Two Interactive have lost 34% of their value in the last 12 months. Analysts expect profits to flip from a loss to a profit in the current fiscal year ending March 31, 2013. At current prices, shares trade for four times current fiscal year estimated earnings.

Big Lots

The discount retailer reports results for the quarter ending April 30, 2012 on Wednesday. Wall Street expects Big Lots (NYSE:BIG[5]) to earn 69 cents per share in the period. The estimate 90 days ago was for the company to make 81 cents per share.

Big Lots has exceeded expectations in three of the last four quarters. Shares of Big Lots have slipped by 4% in the last year.

Analysts expect profit growth of 11% in the current fiscal year ending Jan. 31, 2013. At current prices, shares trade for 11 times current fiscal year estimated earnings.

Hewlett Packard

The technology company reports results for the quarter ending April 30, 2012 on Wednesday. Wall Street expects Hewlett Packard (NYSE:HPQ[6]) to make 91 cents per share in the quarter. The estimate 90 days ago was for the company to make 94 cents per share. The company has bested expectations in each of the last four quarters.

Shares of Hewlett Packard have fallen by 40% over the last 12 months. Analysts expect profits to grow by 10% from the current fiscal year ending Oct. 31, 2013 to the next. At current prices, shares trade for five times current fiscal year estimated earnings.

Stone-Cold Earnings Trade Lock of the Week

Buy the HPQ June call contract with a strike price of $21. This company has been hammered by short traders predicting its ultimate demise. While some of the criticism of HPQ may be justified, like most things, the selling has gone too far. Now with the recent overall market weakness, HPQ is set up for a short covering rally. The trigger will be earnings. The bar is set relatively low. More importantly, at current prices shares trade for a ridiculously small valuation, especially for a technology company.

Toro

The turf maintenance company reports results for the quarter ending April 30, 2012 on Thursday before the market opens. Wall Street expects Toro (NYSE:TTC[7]) to  report a profit of $2.13 per share in the quarter. That estimate is 5 cents per share higher than 90 days prior. Over the last year shares of Toro have gained 3%. Analysts expect the company to grow profits by 18% from the current fiscal year ending Oct. 31, 2012 to the next. At current prices, shares trade for 15.5 times current fiscal year estimated earnings.

Endnotes:
  1. FB: http://studio-5.financialcontent.com/investplace/quote?Symbol=FB
  2. INTU: http://studio-5.financialcontent.com/investplace/quote?Symbol=INTU
  3. ADI: http://studio-5.financialcontent.com/investplace/quote?Symbol=ADI
  4. TTWO: http://studio-5.financialcontent.com/investplace/quote?Symbol=TTWO
  5. BIG: http://studio-5.financialcontent.com/investplace/quote?Symbol=BIG
  6. HPQ: http://studio-5.financialcontent.com/investplace/quote?Symbol=HPQ
  7. TTC: http://studio-5.financialcontent.com/investplace/quote?Symbol=TTC

Source URL: http://investorplace.com/2012/05/172070-fb-intu-adi-hpq-ttwo-big/
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