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Find out where to cut losses and where to hold for more

Earnings season is now in full swing, and not surprisingly, it’s proving to be another volatile one.

stocks earnings reportsIn my options and short-term stock trading, I usually don’t hold a company through its quarterly report. When investing for the longer term, I’m more inclined to hold through earnings with the main focus being further into the future.

And in every case where I believe there’s too much downside risk, I move my money into better opportunities and recommend my readers do the same.

This week, two of my GameChangers companies reported earnings, and both provided some surprises. One worked out in our favor, and we’re holding for more gains; another did not work out, and we cut our losses.

Let’s take a look at each now.

Moving on to Better Opportunities…

Let’s start with Cardiovascular Systems Inc (NASDAQ:CSII), which reported after the close on Wednesday. CSII is leading the way in successfully treating patients with heart disease, including those with arterial calcium — one of the most difficult diseases to treat.

CSII has gained wide acceptance in the medical community, which has driven outstanding top-line growth. CSII also has a patented technology — Orbital Atherectomy System (OAS) — that has several advantages over its competition and has proven to be very successful in treating difficult-to-remove calcium deposits in coronary artery disease (CAD) applications.

CSII has seen its sales grow nicely since its 2008 merger with Replidyne, increasing from $56.4 million in the June fiscal year to $136.6 million in fiscal 2014. Revenue growth also accelerated in the last fiscal year by 31.5%, and in the first six months of fiscal 2015, revenues have continued to grow at a rapid 38.6% pace.

In the fiscal third quarter that CSII just reported, revenues grew another 35%, which was slightly better than expectations for growth of 34%. While CSII reported a net loss of 34 cents per share, those results were in line with expectations.

What changed my outlook for CSII stock was management’s soft guidance for the current quarter. While the cardiovascular business is expected to show nice growth at $9 million, up 11% sequentially from the fiscal third quarter, the implication is that CSII’s peripheral business (which accounts for 80% of total revenues) will grow only 10% from the prior year and be flat from the last quarter.

Management noted on the conference call that new balloon technology is not expected to be tough competition for CSII, but the guidance speaks for itself here.

At a time when high-flying stocks — especially healthcare names — have come under increasing pressure, I see less upside in CSII in light of this slower growth outlook. That’s why I decided it was time to move our money into stronger opportunities.

…Holding On for the Ride Higher

The situation was very different with Total Systems Services, Inc. (NYSE:TSS), which reported after the close on Tuesday. TSS is a global payments solution provider that services financial and non-financial institutions, supporting nearly 49 million payment transactions each day while staying in step with game-changing technologies.

TSS has a very solid earnings history, with sales and earnings per share moving higher each year since 2010. Management successfully continued this trend by reporting a strong 2014, with revenues before reimbursable items increasing a little more than 20% thanks to 5.2% organic growth. Growth was solid in both North American services (up 10.9%) and international services (up 6.3%).

TSS management had provided encouraging guidance for 2015, and I was extremely pleased to see the guidance hold true when earnings results hit the market on Tuesday. TSS reported a strong earnings beat, reflecting record transaction volumes for the third consecutive quarter thanks in part to the addition of Bank of America Corp (NYSE:BAC) as a customer in mid-February.

TSS saw 11.7% revenue growth — primarily driven by an 18.7% increase in North American services and a 16.7% increase in NetSpend, TSS’ prepaid card business — and while international revenues fell 4%, they were up 5.1% on a constant currency basis.

In fact, each of TSS’ four business segments realized substantial operating leverage and segment operating income climbed 29.8% in the quarter.

I also really like that management remains committed to returning capital to their shareholders, repurchasing 1.45 million shares (slightly less than 1% of total outstanding shares). Including dividends, TSS returned 73% of free cash flow to shareholders in the first quarter.

Despite beating earnings estimates by 6 cents per share, TSS revised its full-year EPS growth to 12% – 14% from 11% – 13%. I think management is actually being somewhat conservative and believe that EPS can grow a little less than 15% this year to $2.25 and another 10% next year to $2.47.

Earnings growth is well-defined in the near term, and TSS stock is trading at 16 times 2015 estimates. In a market where some big winners are looking tired, TSS will still have significant upside.

This was a case where earnings worked in my favor, pushing my position to a solid return with likely additional upside. We continue to own TSS stock in GameChangers, and I view Total Systems Services as still a good buy if you can get it under $40.

Hilary Kramer is the editor of GameChangers and Breakout Stocks Under $10.

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