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Don’t Be Swayed by Earnings Fluctuations

If one of your stocks gets slammed on earnings, you don't necessarily need to sell


Earnings season is in full swing again, with all the usual hype. As a long-term investor, how should you react to the parade of announcements?

Calmly and opportunistically.

Calmly, because investors with a long-term perspective know that one quarter’s results only represent a tiny portion of a company’s ultimate worth. The value of a business unfolds over many years. To extrapolate one quarter’s numbers, good or bad, far into the future is the height of folly.

Yet Wall Street, dominated as it is by shortsighted “momentum” players, indulges in such silliness all the time.

That’s where the opportunity arises.

When the crowd overreacts to a quarterly earnings report, you get a chance to take the opposite side of the trade. Last Tuesday morning’s selloff in Coca-Cola (KO) was a perfect example. It’s a strong company that I still consider a buy, but you could have snapped up the shares as low as $39.50 on Tuesday in the wake of Coke’s earnings release.

Next, the savages went to work on Intel (INTC), shaving 5% off the stock in three days after the microprocessor maker posted lower than expected Q2 revenues and lowered its profits guidance for the full year. As a result, INTC now offers reasonable value again for income investors. (Not a bargain or a steal; reasonable value.)

But for total return over the next 12 months, I actually like another tech name better: Qualcomm (QCOM), a leading producer of semiconductor chips for cell phones.

QCOM boasts much stronger earnings momentum right now than Intel. Profits for FY13 (its fiscal year ends Sept. 30) will likely spurt more than 20%.

The company is also totally debt-free — my kind of balance sheet!

However, the analyst community is already fretting about a slowdown in Qualcomm’s growth, even before management has issued June-quarter results. (It’s set to report this Wednesday.)

In cases like this, where the Street works itself into a lather ahead of an earnings release, it often pays to buy before the figures are published. With QCOM trading at a modest 13 times this year’s estimates (and only a little over 12 times next year’s), I think we should make our move now.

Current yield: 2.3%. Buy QCOM at $64 or less. I’m projecting a total return of 20% or more in the coming year.

Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk value approach has won seven Best Financial Advisory awards from the Newsletter and Electronic Publishers Foundation.

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