7 Stocks You Need to Watch This Earnings Season

Earnings season provides a good opportunity for fundamental investors to track the state and progress in the underlying businesses in which they are shareholders. However, earnings announcements also present certain risks that investors should be aware of. Below, I'll highlight seven stocks that could exhibit greater volatility than the average as well as strategy to manage that risk.

Premium valuation + earnings uncertainty = A recipe for negative surprise
The stocks in the following table all sport premium valuations compared to their industry peers and high variability in analyst estimates. Furthermore, they have an EQ score that is average or below-average. (The EQ score is part of an earnings quality model developed by The Motley Fool's John Del Vecchio to identify potential "short" candidates. Companies with low quality of earnings typically underperform the market.)

Company

Forward P/E Multiple

EPS Estimates (Low/ Average/ High)

EQ Score

Equinix (Nasdaq: EQIX  )

54.3

$0.13/ $0.23/ $0.48

C

Goodyear Tire & Rubber (NYSE: GT  )

14.3

($0.11)/ ($0.05)/ $0.13

D

MBIA (NYSE: MBI  )

20.3

($0.82)/ ($0.27)/ $0.21

N/A

United States Steel (NYSE: X  )

48.3

($1.55)/ ($1.11)/ ($0.42)

D

Wynn Resorts (Nasdaq: WYNN  )

47.7

$0.41/ $0.59/ $0.86

D

Source: Capital IQ, a division of Standard & Poor's, The Motley Fool, Yahoo! Finance.

A high variability of estimates around the consensus suggests there is a greater likelihood of an earnings surprise (positive or negative). If a stock is already fully valued or -- perish the thought -- overvalued, a negative surprise can produce an immediate and painful revaluation.

Put a collar on those shares!
One way to mitigate that downside risk is to put a collar on the shares you own. Imagine that you've owned Apple shares in your portfolio for several years, and you're concerned about protecting your accumulated profits on the position. In order to do so, you purchase a January 2012 put option at a strike price of $300. That put gives you the right to sell those shares at that price on or before the option expiration date, thereby capping any potential loss at 12%.

In order to offset the cost of the put, you simultaneously sell a January 2012 call option with a $400 strike price, thereby selling someone the right to acquire the shares should they reach that level. The net cost of this insurance: $2.40 per share, or roughly three-quarters of a percent of the value of your position. In establishing the collar, you are trading some of the upside on your stock position to limit your downside risk. Your upside and downside returns are contained -- thus the name "collar."

A real-world example
Motley Fool Pro likes medical technology company Kinetic Concepts -- it's the second-largest position in Pro's $1.4 million portfolio, and the team continues to rate the stock a buy. However, last October, Pro advisor Jeff Fischer was concerned that, on the back of several disappointments, a negative third-quarter earnings report could leave the stock wounded. In order to protect the position, Jeff put on a collar that actually generated income for the portfolio -- he received more for the calls he sold than he paid for the puts. His fears proved unwarranted, but why pass up no-cost insurance?

Be wary of "sure thing" earnings
Investors in stocks in the above table aren't the only ones who might want to consider a collar strategy. Indeed, while a wide spread in analyst estimates indicates a broad range of opinion concerning a company's operating performance, an excessively narrow spread could indicate complacency or groupthink among the analysts that cover the stock. In this case, an earnings miss or similar disappointment can hammer a stock. Here are two stocks whose valuations look stretched, and on which analysts seem in near-complete agreement regarding last quarter's results:

Company

Forward P/E Multiple

EPS Estimates (Low/ Average/ High)

EQ Score

Green Mountain Coffee Roasters (Nasdaq: GMCR  )

29.9

$0.15/ $0.16/ $0.18

F

Sirius XM (Nasdaq: SIRI  )

52.0

($0.02)/ $0.00 / $0.01

N/A

Source: Capital IQ, a division of Standard & Poor's, The Motley Fool, Yahoo! Finance.

By mentioning specific names, I'm not trying to shake out long-term investors. If you're convinced of your thesis regarding any of these stocks, there is no call for rash action on this basis. However, even patient, fundamental investors need to be aware that the right strategies to manage short-term risks can materially improve a portfolio's long-term returns.

Your next step to a better managed portfolio
If you're interested in finding out more about option strategies that could help you reduce the downside risk to your portfolio and add to your overall returns, drop your email in the box below. In return, Jeff Fischer will send you his free report, How to Profit From the One "Sure Thing" Coming in 2011, along with an individual invitation to join Motley Fool Pro, which is open to new members for a short time. These strategies could put your portfolio at an advantage in what is shaping up to be a very tricky market to navigate. 

Fool contributor Alex Dumortier, CFA has no beneficial interest in any of the stocks mentioned in this article. Green Mountain Coffee Roasters is a Motley Fool Rule Breakers pick. Try any of our Foolish newsletter services free for 30 days.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (19) | Recommend This Article (28)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 19, 2011, at 3:26 PM, ItAintCool wrote:

    And the SIRI bashing continues at MF. Sure you used a velvet glove with your disclaimer "I'm not trying to shake out long-term investors. If you're convinced of your thesis regarding any of these stocks, there is no call for rash action on this basis." but the concerted effort seems to tell people to get out of SIRI and wait for the Pandora IPO. I know you didn't mention Pandora, Alex, but so many of your fellow MF's are pumping Pandora while bashing SIRI. It seems almost too well orchestrated.

  • Report this Comment On January 19, 2011, at 4:23 PM, TMFAleph1 wrote:

    @ItAintCool

    What isn't cool is to suggest that I am part of some sort of conspiracy relating to Sirius. This conspiracy theory is absurd and completely without merit. I have had ABSOLUTELY NO CONTACT WHATSOEVER with anyone at the Fool or anywhere else concerning Sirius. The company is not part of the areas I cover. I recommend you spend more time focusing on the businesses you own and less time fantasizing about plots to drive down the price of Sirius stock.

    Alex Dumortier

  • Report this Comment On January 19, 2011, at 6:05 PM, plantoretire1day wrote:

    TMFMarathonMan

    It would have been nice to read a reasonable response to ItAintCool's comment. I too was wondering about the SIRI bashing since I am invested as well. Fool.com remarks are impactful to stock value and Pandora is not as free as it used to be from what I have seen.

    Likely ItAintCool is a customer, whether past, present or future who helps to pay your salary. He/she may be expressing some thoughts others share, even if only in part. Rudeness like your response is unnecessary given the circumstances, on the other hand, a professional and knowledgable response is appreciated by me and others. This helps others to make a more informed decision on investment choices.

  • Report this Comment On January 19, 2011, at 6:10 PM, samedge wrote:

    Every time SIRI is mentioned on TMF, all shareholders who part of the community feel the need to spew venom. Why is that? Are you that nervous about your investment?

    If you're confident, let the performance of the company you hold own do the talking. Don't drop a dump on someone (ANYONE) who dares disagree with you. Or at least keep it professional. Otherwise, this is really juvenile behavior.

  • Report this Comment On January 19, 2011, at 6:44 PM, TMFAleph1 wrote:

    @plantoretire

    That someone is a customer does not give them every liberty.

    Try going into a business that you patronize on a regular basis and suggest to an employee that he/ she is part of a company-wide, illegal and unethical conspiracy without being able to produce the slightest shred of evidence. Let me know what sort of reaction you receive.

    I'm sorry if my responses in this matter are curt, but I take the integrity and quality of my research and writing extremely seriously and I find such innuendo offensive in the highest degree.

    Alex Dumortier, CFA

  • Report this Comment On January 19, 2011, at 7:10 PM, TMFAleph1 wrote:

    ItAintCool & plantoretire1day,

    Let me add that Sirius shareholders should be very grateful for the amount of coverage that the Motley Fool has given Sirius over the years, coverage which is out of all proportion to the company's economic or financial importance. This is largely because one writer has chosen to follow this stock VERY closely for the benefit of an ardent core group of shareholders.

    Alex Dumortier, CFA

  • Report this Comment On January 19, 2011, at 8:18 PM, doubting wrote:

    Alex,

    Let us assume for the sake of the argument that most of the people who read MF opinions are individuals capable of analyzing and arriving at appropriate decisions based on their analysis. What I do not like about your siri opinion is that you seem to apply a Procrustean bed technique. I do not want you to generalize but rather be specific. To illustrate, if you said that investing in siri before merger 2.5 years ago was a great risk with doubtful reward, I would definitely agree. Saying that buying siri shares on the verge of bankruptcy (which I did) was almost crazy, I would agree. However, to say that the company with over 20M subs, fully established ground and space infrastructure, virtually 100% radio dominance in the auto, dozens of long-term contracts with talent and practically all meaningful sports organizations, turning profit in 2010 and growing revenue, EBIDTA and cash flow at over 20% a year is overvalued is blatantly arrogant. The company has finally put its act together. It has multiple sources of EBIDTA and fcf growth, including enormous merger synergies and NOLs. It is a radio giant with very strong and immensely focused management. The company presents uniquely diverse and top quality content, fully controls means of delivery and has virtually no competition is radio subscription business. Pandoras and the likes will never ever truly rival siri because they cannot afford the content. Their niche is music at my computer or office at best.

    2010 was the best proof of the above. The company grew by over 1.3M subs in very tough economy; revenue will be over $2.8B; EBIDTA close to $700M and fcf over $150M. This phenomenal turnaround happened in only about 18 months since the bail out by Malone. You want more proof. 2011, 2012, 2013 and on will be great years for a zillion reasons from better economy impact to more siri equipped autos on the road; lower SAC due to after market growth; higher ARPU for the same reason; possible $2 price hike in August 2011; further brand recognition, very small capex, further merger synergies, etc. My question is “how many more months or years it will take for guys like you to say, yes, this is a great company with a great future. Get on the wagon now until it is too late”. I am afraid you will never say that. And if you do, who will listen to you!!! It will be really too late.

  • Report this Comment On January 19, 2011, at 8:23 PM, mountain8 wrote:

    Rudeness like your response is unnecessary given the circumstances.

    Rude??? What's rude???? Calling a writer and analysist a Fraud and Liar or what.

    You're an idiot, how's that for rude.

  • Report this Comment On January 19, 2011, at 9:21 PM, ItAintCool wrote:

    Mr. Dumortier

    I don't know why my last comment never got posted. Perhaps too many links. Basically it was a link to a bunch MF article in the last 30 days that was pumping Pandora and/or telling people to dump SIRI. It wasn't all of them, but needless to say there were quite a lot. Most of it negative on SIRI, with Rick Aristotle Munarriz being the lone dissenter on the positive side.

    Now I could go into writing about your arrogant tone about how you wrote that we should be "very grateful" for MF's coverage. Personally I would be more grateful if you stop covering SIRI at all. The majority of MF's coverage is incredibly slanted and negative. Most of which seems focused on taking the stock down and, in the past year, pumping a paper tiger which is Pandora. If you want an example let me give you this one.

    Yesterday, Jim Royal wrote an article called "This Stock is a 30 Bagger", it talked about SIRI and he admitted the stock has gained more than 3,000% since its all time low in 2009. Then he concludes "So is Sirius a 30-bagger from here? Not likely. The company is already well too big with a $6 billion market cap. And there are some serious challenges for the satrad company, such as Pandora, which allows listeners an infinite variety of music at the low, low cost of free. And it's making its way onto Sirius's home turf, too: automobiles."

    Then he goes on to talk about 6 other stocks he doesn't see becoming 30 baggers. Now all in all it's an article that covers multiple stocks, but it's also a negative article on SIRI and another plug for Pandora.

    But that's not the only issue with this article. My biggest issue is that the next day Motley Fool changed the name of the headline of this article from "This Stock is a 30 Bagger" to "A 30-Bagger You May Want to Avoid". Clearly, somebody at MF wanted to change the title from a statement of fact to something negative that clearly focused the attack on SIRI. Why? Why do it at all, unless MF wants to keep painting SIRI in a bad light for the retail investor every time they do a search for SIRI on MF or Yahoo.

    Can you give me a reasonable explanation why you would change the title of the article a day later? In fact, since the article covers 6 stocks equally (including SIRI). So why is MF focusing the headline solely on SIRI in a negative way? And most importantly, what was the need to change the headline? In my humble layman's opinion, (or as you would see it, my conspiracy-theory-fantasists opinion) it looked like MF went deliberately out of its way to paint SIRI in a negative light by changing the headline of that article.

    The reason MF covers SIRI so frequently is not solely for our benefit, it's because it's an immensely popular stock. It is usually one of the top 5 NASDAQ stocks traded daily. And anytime you mention in a MF article, it is guaranteed to get web hits by retail investors such as myself. Which in turn tries to get you more subscribers to the benefit of MF. And also probably helps to rate the popularity of the writers here. I don't know how you are paid for your work, but I'm guessing the popularity of some writers, who get more web hits, may give them an edge in terms of higher pay or requests from MF for more articles. My guess is if you want to get more web hits for what you write, don't forget to mention SIRI somehow.

    MF is now like Fox News or MSNBC. They claim to be impartial evaluators in their reports or even from their pundits, but both networks clearly have a left-leaning or right-leaning agenda. MF seems to have an anti-SIRI, pro-Pandora agenda. Don't believe me, just search under SIRI in MF for the last month and read how many articles pump Pandora and dump on SIRI.

    Anytime MF wants to do a complete blackout on stories about SIRI (since you seem to imply that your coverage of it seems to outweigh its corporate value), I will be willing to stop accusing this site of their negative agenda against the stock. Otherwise, I invite the readership to view the evidence for yourself. How many MF writers in the last 2 years have actually supported this stock on its way up to become a 30-bagger? The answer is one, Rick Aristotle Munarriz. The rest have not.

    In this conspiracy-theorist fantasy-making person's (as is the portrayal given to me by Mr. Dumortier) humble opinion, I wholeheartedly believe there is an agenda by MF to manipulate SIRI and Pandora. I can at least show a pattern via the history and content of MF's articles. You, Mr, Dumortier, by your own words say you have "ABSOLUTELY NO CONTACT WHATSOEVER with anyone at the Fool or anywhere else concerning Sirius". Therefore you have no way to disprove MF's intentions regarding these stocks, since you do not know the goings on within MF regarding their coverage of these stock.

    All I say to the readers out there is do your own due diligence. Search MF over the last 30 days and see how many positive references there are to Pandora and how many negative references there are to SIRI in all the articles listed. MF does not need to do us any favors in covering this stock if, as Mr. Dumortier says the coverage of SIRI "is out of all proportion to the company's economic or financial importance." But yet the Fool continues to do so. The question is, why?

  • Report this Comment On January 20, 2011, at 12:19 AM, hbofbyu wrote:

    The Siri lovers doth protest to much! You are too in love with this stock! It's not a woman. Just because it has treated you well in the past is no predictor of its future. Siri as a company has no where to go. They are heart and soul invested, committed, and chained to stagnant satellite broadcasting..

    Satellite radio = Uni-directional static content, multi-million dollar contracts and program expenses, expensive satellite maintenance, limited channel selection, Satellite radio is a nice version of quality FM radio.

    My i-phone already gives me more content and more choices than satellite radio - even in my car! I can choose content on demand, when I want, how I want and I have about billion more choices than a satellite in a decaying orbit can give me.

    I've got some 2013 put options that I'm betting my mortgage on. Let's talk in two years.

  • Report this Comment On January 20, 2011, at 6:48 AM, fightinag04 wrote:

    Maybe the real conspiracy here is to see which writer at the Fool can get the most negative comments from overzealous SIRI investors on any given day. I wonder what the record might be at this point....

    The fact is, the writers here are individual people, with individual opinions. They don't have to believe in a stock or its prospects, and like all of us, are free to invest and write how they choose. You don't have to read their articles. By only wishing and looking for positive writing, it seems most SIRI investors that are regulars on this site are falling into the trap of confirmation bias, and that maybe the negative articles might be food for thought. I agree with samedge. If you're confident in your own research and due diligence, why does it matter what someone else writes?

    There's plenty of other stocks that different writers at the Fool disagree on, but none seem to receive the venomous responses that an article on SIRI elicits.

  • Report this Comment On January 20, 2011, at 8:51 AM, dontwin wrote:

    Would you comment on TSTC which "the Fools" recommended so highly then tanked! Looked like insider trading to me.

  • Report this Comment On January 20, 2011, at 9:22 AM, doubting wrote:

    hbofbyu,

    I am very sorry for you and your family in 2013. Your action speaks for itself. No comments.

  • Report this Comment On January 20, 2011, at 9:33 AM, longtheworld5 wrote:

    the stock that will take us from zero to wealth the quickest. if anyone has time please come check out my site http://longtheworld.com/ click on an ad, leave a comment, bring some interesting and knowledgeable discussions i would appreciate it thank you.

    p.s. thank you motley fool

  • Report this Comment On January 20, 2011, at 7:45 PM, David369 wrote:

    Poor MF, catching hell on Siri. You have to admit, the numbers don't look that great on Siri so I can't blame MF for being down on it going strickly by the numbers. They are all entitled to their opinions and I like to hear for & against. Yeah, mostly they seem against but that's ok. I think Siri is a gamble (any stock is to some extent). I like the fact that Siri has a moat of being the only sat radio and it hit bottom and hopefully it's on the way up. Pandora may one day be some competition but it isn't today. Until that day comes the stock price is at the whims of the many as influenced by the mentality of the few. So what, place your bets or not as you see fit and don't worry about what anyone may say.

  • Report this Comment On January 24, 2011, at 10:18 PM, newageinvestor wrote:

    Wow, I've never seen a pie fight in these comment strings. Very ugly.

    You don't accuse someone of trying to pump up or push down the price of a stock and expect the person you're accusing of such unethical behavior to sit back and eat it. Period.

  • Report this Comment On January 31, 2011, at 4:51 PM, plantoretire1day wrote:

    The point is, other readers are trying to get something out of this forum. Calling names and TMF professionals getting offended and not addressing concerns does not help me in my investment stradegy or my confidence in TMF.

  • Report this Comment On February 03, 2011, at 7:08 PM, Mstinterestinman wrote:

    I don't agree with the Negative opinions on GMCR and I am Invested but wow I lost thousands on Siri and learned my lesson if the business behind a stock

    isn't that great then walk away. Siri if it survives will be like the Automakers or the steel companies of years ago or the Airlines. Anyone want to tell me what most capital intensive businesses end up doing for shareholders?

  • Report this Comment On February 03, 2011, at 7:09 PM, Mstinterestinman wrote:

    Everyone is entitled to their own opinions could we at least try to stay civil about our disagreements? Ok I'll be quiet now..lol

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1425149, ~/Articles/ArticleHandler.aspx, 11/27/2014 8:44:08 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement