7 Reasons to Worry About Next Week

There may be more to the "sell in May and go away" yarn given the volatile summer trading that we've been experiencing.

It's unlikely to get any calmer come August, with several companies set to kick off the month with earnings reports next week.

I'm worried, given the large number of companies that are targeted to post lower quarterly profits next week than they did a year ago.

Let's go over a few of the blue chips and seemingly recession-proof companies where analysts see the arrows pointing down on the bottom line next week. Some of the names may surprise you.

Company

Latest Quarter EPS (Estimated)

Year-Ago Quarter EPS

Procter & Gamble (NYSE: PG  )

$0.73

$0.80

Electronic Arts (Nasdaq: ERTS  )

($0.35)

($0.02)

Activision Blizzard (Nasdaq: ATVI  )

$0.05

$0.08

STEC (Nasdaq: STEC  )

$0.00

$0.42

Rosetta Stone (NYSE: RST  )

$0.13

$0.20

Smart Balance (Nasdaq: SMBL  )

$0.00

$0.02

Garmin (Nasdaq: GRMN  )

$0.73

$0.83

Source: Yahoo! Finance.

Clearing the table
There will be several companies posting lower earnings next week, but these are just a few of the names that really jump out at me.

Let's start with Procter & Gamble. The consumer-brands juggernaut isn't immune to economic slowdowns. Thrifty shoppers choose store-brand potato chips and laundry detergent, instead of loading up on Pringles and Tide, respectively. Rather than blindly dropping Pampers diapers, Crest toothpaste, or Bounty paper towels into their shopping carts, they fish around for the brands on sale that week. Brand loyalty typically returns when discretionary income follows suit, but Wall Street apparently doesn't see that happening for Procter & Gamble right now.

EA and Activision Blizzard are the country's two largest video game publishers. The industry has been in a slump since early last year. Are casual gamers moving on to lighter -- and cheaper -- diversions on their smartphones and social networks? Are diehard gamers milking more out of their games through online engagement, giving them less time and reason to buy more games?

This is a tricky time for the sector. When console makers lowered their system prices heading into last year's holiday season, developers assumed that they would be the logical beneficiaries. However, now that consoles do everything from stream movies to surf the Internet, software giants need to step up their game. If there is a silver lining to next week's reports, it is that this is the seasonal lull in the industry. EA and Activision Blizzard have time to get it right before the telltale holidays kick in.

STEC is a well-managed data storage company that is currently finding it hard to think about its past. Wall Street sees STEC breaking even on Tuesday, a far cry from the $0.42 a share profit it delivered a year earlier. The pros also see STEC's top line taking a 42% tumble. Analysts do see the company bouncing back next year, so turnaround investors will be checking in to hear any glimpse of STEC bottoming out. The company is trading well off its 52-week highs, so there is some serious room for upside if STEC can get going again.

Rosetta Stone is the popular language educator, selling its software through direct mail, infomercials, and even airport kiosks. This would certainly seem like a good time to be offering the world's citizenry an easy way to brush up on foreign languages. Unfortunately, the trend toward globalization is not without its speed bumps when it comes to what the pros expect out of Rosetta Stone when it reports next Thursday.

Smart Balance is best known for its heart-healthy vegetable spreads. Its national rollout of an enriched milk product line was supposed to fuel growth, but that initiative has gotten off to a lumpy start.

Finally we have Garmin, the GPS giant that was a growth stock darling several years ago when everybody was gifting the company's navigational devices. It's been harder to stand out as many potential customers own smartphones with built-in navigation, but Garmin seemed to be on the way back recently. It has posted year-over-year growth on the bottom line in each of the previous quarters. Unfortunately, analysts believe that the positive streak will hit a dead end next week.  

Why the long face, short seller?
These reports aren't likely to be pretty, but there's still room for glimmers of optimism within the pessimism.

Investors are already braced for the worst with these reports. If there is an upside to this grim list, it's that lower profitability is already baked into next week's reports. It actually opens the door for unexpected surprises.

The more I think about it, the less worried I become.

Smart Balance is a Motley Fool Rule Breakers pick. Activision Blizzard, Electronic Arts, and Rosetta Stone are Motley Fool Stock Advisor recommendations. Procter & Gamble is a Motley Fool Income Investor recommendation. The Fool owns shares of and has written cover calls on Procter & Gamble. Motley Fool Options has recommended a synthetic long position on Activision Blizzard. The Fool owns shares of Activision Blizzard. Try any of our Foolish newsletters today, free for 30 days.

Longtime Fool contributor Rick Munarriz wonders if his contrarian heart will ever be happy. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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