3 Stocks to Sell Before They’re Crushed by Earnings

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stocks to sell - 3 Stocks to Sell Before They’re Crushed by Earnings

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The market has been on a tear this week, and the major needle-mover has been a slew of strong earnings reports. But earnings season is just starting, so that means the whole market is up on a small sample size. In other words, there is a lot of earnings extrapolation going on in the market right now, with some stocks to ride higher and some stocks to sell.

3 Stocks to Sell Before They’re Crushed by Earnings SBUX UAA GPRO

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That is a favorable setup for traders looking to short some over-hyped names into their earnings reports. Across the board, valuations are starting to look lofty, investor sentiment is positive and expectations are high.

That is usually a good time to get short.

I’ve identified a few companies set to report earnings this week that look susceptible to a major pullback if they report sub-par numbers, making them stocks to sell ahead of time.

Stocks to Sell Before Earnings: Starbucks (SBUX)

Stocks to Sell Before Earnings: Starbucks (SBUX)

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Shares of Starbucks Corporation (NASDAQ:SBUX) were stuck in neutral in 2016. Comparable sales fell below 5% for the first time in 25 quarters and stayed below 5%. Traffic actually fell year-over-year. Margin expansion began to slow by the end of the 2016. Overall, 2016 was a forgettable year for SBUX stock.

But investors seem to be pricing in a big 2017 turnaround. SBUX stock dipped to $54-and-change in mid-March. Now, it’s a $61 stock. That is a 12.5% gain in a little over a month, and it came without a material catalyst.

That big of move on not much news puts the stock seriously at risk heading into the Q1 report, which is due Thursday after the markets close.

From a valuation perspective, SBUX stock looks particularly risky here. At $61, the stock is trading at nearly 25 times this year’s consensus earnings per share estimate of $2.13. By comparison, Facebook Inc (NASDAQ:FB) and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) trade at 22 times this year’s consensus EPS estimates. The market is treating SBUX stock like a high-growth, big-moat tech stock name.

But it’s not.

It’s a coffee company that is losing market share and popularity. A research firm that uses location signals from mobile phones to calculate foot traffic — xAd, Inc. — found that Starbucks lost foot traffic market share in February. Competition is getting stiff, and the all-day breakfast trend we are seeing at fast-food chains is certainly hurting Starbucks. McDonald’s Corporation (NYSE:MCD) is at the heart of this, as they are now offering all McCafe drinks for simply $2.

Starbucks mind-share among U.S. teens is also falling. According to Piper Jaffray’s Taking Stock With Teens Survey, Starbucks had 14% mind-share in the Fall 2016 survey. That fell to 12% in the Spring 2017 survey. Many times, trends begin and end with young consumers, so slippage here is not a positive.

To make matters worse, Starbucks is reporting against a soft macro restaurant backdrop. Traffic and same-store sales dropped industry-wide in Q1.

Q1 results will likely disappoint, and SBUX stock will likely collapse, given its 12.5% move in the past month. The short thesis looks pretty compelling, making this among some wise stocks to sell here.

Stocks to Sell Before Earnings: Under Armour (UAA)

Stocks to Sell Before Earnings: Under Armour (UAA)

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Under Armour Inc (NYSE:UAA) stock has been hammered lately, but it looks like the stock could head even lower. UAA is set to report Q1 earnings before the bell on Thursday, and I think the stock is a good short into that report.

Most data points imply Under Armour had quite the unimpressive quarter. Search interest trends for “Under Armour” have been weak to start the year, both domestically and internationally. Web traffic analytics site SimilarWeb shows that Underarmour.com traffic is trending down. Fellow web traffic analytics site Alexa shows a similar downward sloping traffic trend for Underarmour.com, with much of that weakness coming at the beginning of 2017.

Piper Jaffray’s Spring 2017 Taking Stock With Teens Survey indicates that Under Armour is losing share and relevance among young shoppers.

Analysts with Deutsche Bank have already expressed concern that Q1 sales will disappoint. Specifically, those analysts point to weak direct-to-consumer sales as a potential drag on UAA results. Data from Google Trends, SimilarWeb and Alexa all corroborate this bearish Deutsche Bank thesis.

It also looks like Under Armour basketball continues to struggle. According to Foot Locker, Inc.’s (NYSE:FL) top-selling list, the signature Curry 3 line is struggling on Footlocker.com. The Curry line is also struggling at Finish Line Inc (NASDAQ:FINL) and Dicks Sporting Goods Inc (NYSE:DKS), per Finishline.com and Dickssportinggoods.com.

Overall, it doesn’t look like the quarter was that good. Granted, analysts are only looking for around 6% sales growth versus 12% last quarter, but the steep drop-off in interest surrounding the Under Armour brand to start the year implies UAA could miss even those chopped estimates.

I think that means a “look out below” scenario for UAA stock. The stock is hovering not far from all-time lows, but still trades at a rather absurd 37.4 times forward consensus earnings. The valuation is being propped up by optimists who believe the UAA growth story will get back on track. A slow Q1 would be a huge hit to that thesis, and I think we could see some big selling when UAA reports on Thursday.

Stocks to Sell Before Earnings: GoPro (GPRO)

Stocks to Sell Before Earnings: GoPro (GPRO)

Much like Under Armour, the market has taken the wind out of GoPro Inc’s (NASDAQ:GPRO) sails. Once a near-$90 stock, GPRO now trades just around $9 per share.

Also like Under Armour, I think there is more downside ahead.

GPRO is set to report earnings after the bell on Thursday, and the data doesn’t look good. GoPro search interest trends have been quite weak to the start the year, with search interest down roughly 8% year-over-year so far in 2017. United States search interest in GoPro has been especially weak to start the year.

The story doesn’t look better in the long-term, either.

Smartphone cameras are only getting better. And now, smartphone apps are pivoting to make those smartphone cameras more fun to use. With social media giants like Snap Inc (NYSE:SNAP) and Facebook making aggressive moves to build-out their platform’s camera functionality, the need for young consumers to buy a GoPro camera is as non-compelling as ever.

Yes, costs are coming out of the system at GoPro. Yes, the company does have a Karma drone revenue tailwind. But the core market is shrinking, and the stock is extremely expensive at more than 70 times next year’s consensus earnings estimate.

GPRO stock is historically very volatile around earnings. I expect much of the same volatility this time around, and believe it will be skewed to the downside.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2017/04/stocks-to-sell-earnings-sbux-gpro-uaa/.

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