Thursday, March 29, 2007

Playing Global Payments (GPN) Before The Earnings

When evaluating GPN I found several positives given the recent decline in the stock. GPN has a lot of analyst support with mean year-end price target of 50.00. GPN is currently trading at 38.90 and has hovered around that level since their last earnings miss.
This is a good opportunity for investors to cash in on a potential upside catalyst. The recent sell-off has pushed the stock's P/E below the industry's average, reducing a lot of downside pressure on the stock if tomorrow's earnings go bad. Another nice thing about this play is the high correlation between the earning surprises and changes in the stock's price (around .964, with 1 being the highest). With this correlation investors do not have to worry about having a negative stock reaction after a positive release.

The one potential problem with the stock is the third quarter's substantial miss. Buying into a negative stock is always risky and should be noted. While the last report was not encouraging, the prior four quarters beat estimates handily.

I am buying this stock with a limit of 38.98. Due to the recent plunge of the stock, I feel that any beat could yield up to an 8% run-up tomorrow. A miss should result in less than a 4% plunge due to the low P/E ratio.

Lessons Learned

I learned some lessons yesterday so I am refining/adding to my earnings evaluating process.

Change #1: Respect High Multiples
- KMX was riding on a really high multiple (P/E ratio) which basically states that investors have priced in a significant amount of expected earnings growth into the stock price. This high multiple ultimately left a significant amount of downside pressure on the stock. The company missed the estimate and investors questioned the accuracy of the P/E ratio and sold the stock.

Change #2: Evaluation of Downside Surprises
- I was too blinded by the history of CarMax's recent successes to property forecast the consequences of an earnings miss. For future earnings plays I will attempt to retrieve a better understanding of what the stock may do if the numbers aren't so great.

Change #3: Stay Away From Cramer
- After I purchased KMX my friend mentioned that Cramer told his fellowship to buy the stock before the earnings. The stock price was highly inflated when I got in the game because of the pull Jim Cramer has on investors. Cramer has a recent history of terrible stock picks (CWTR, STZ, the list goes on) and picking a stock that he likes is a true mistake.

I will be posting potential plays later on today...

Wednesday, March 28, 2007

Three Earnings Plays

Basically there are three potential earnings plays that I like today, but I am only going to act on one. Well start with Paychecks (PAYX). PAYX, quoted at 39.50, is slightly off its 52 week high of 42.50. Earnings Whispers says the company will beat the estimated earnings number of $.35 by a penny. Paychecks has beat the estimate four out of the last five quarters and the one time it missed the stock actually moved up. This appears to be a good play for a safe investor. I do not think the stock will move much more than 2% either way on the news, unless the actual earnings are significantly different.

A more riskier earnings play is Smart Modular Technologies (SMOD). SMOD is well off its 52 week high and has recently had significant trend downward. The stock has beaten estimates three out of the last four quarters, but moved up significantly after the one miss. Earnings Whispers feels that SMOD will beat the estimates by a penny, but if SMOD keeps up is historical trend of beating estimates, one could expect another penny higher. Investors should be cautious of this stock because of the volatility around earnings. SMOD has averaged a 5.05% price fluctuation after the release. Personally, I am going to stay away from this one.

I am going to play CarMax (KMX). This stock is slightly off its 52 week high and needs the proper catalyst to break through that technical barrier. I think an earnings beat could be the answer. CarMax has smoked estimates five quarters in a row, beating the consensus expectations by an average of 25.58%. The stock moves around 4% each earnings release, which I can afford to lose. The Earnings Whisper number is $.47 compared to $.21 cents a share, signifying a potentially mammoth beat.

I set my limit for $27.35; see you at $30 tomorrow!

Back to School

I figured it was time I started getting back into the habit of blogging. Per the request of many of my investment buddies, I thought I would start sharing some of my trades and stock evaluations. Yesterday I shared Accenture (ACN) and earnings play. Accenture had a solid chart and a history of recent earnings successes (see image below). Today Accenture is up over 2% while the Dow is down almost 1%.

Along with some potential short-term plays, I will be sharing my monthly trade history so everyone will have a good idea of what positions I am taking during this volatile year.