October 1st is just around the corner. For most people, that means warmer clothes, changing colors outside, and bouts of cursing at the TV as referees rob your favorite team of a victory (can you tell I'm a Packers fan?).
But for investors, it also means the end of the third quarter, and the beginning of earnings season. We here at the Fool encourage investing with a long-term horizon of time. That means that we should take a balanced view of quarterly earnings reports; pay attention, but never give too much weight to any one report.
At the same time, if your favorite stock could experience a huge swing, it's best to prepare yourself emotionally, and understand why such moves might occur.
But first, the back story...
In March, I singled out five companies that were poised to make big moves based on the fact that many traders were betting against them. If a highly shorted company releases positive news, a short squeeze will be on. If news is bad, shorting could continue indefinitely.
It turns out I was right: The stocks I mentioned moved an average of 16% on their first-quarter-earnings releases.
I did the same thing again this summer, and the results were eerily similar: The average stock moved almost 20% after earnings were announced.
Below are the two energy stocks that could make big moves:
|Company||% Float Short||Earnings Date||Expected Rev.||Expected EPS|
|Westport Innovations (Nasdaq: WPRT )||37%||Oct. 29*||$101.5M||($0.32)|
|McEwen Mining (NYSE: MUX )||38%||Oct. 29-Nov. 2||$68.3M**||$0.16**|
Source: finviz.com, Thompson Reuters, E*Trade. * No date given by company, this was date earnings were released in 2011. **Numbers are for fiscal 2012, not just third quarter.
A tangential energy play
Westport Innovations is a company that designs engines for cars, trucks, and other heavy machinery that can run solely on natural gas. Many Fools believe that the great abundance of natural gas -- now available because of new fracking methods -- means that it will be the fuel of choice for tomorrow's trucking fleets and even household cars.
Whether that turns out to be true is yet to be seen, but Westport is actively investing in a future with such potential. That helps explain why, even though the company has grown revenue by over 100% since last year, it has yet to turn a profit. That also helps explain why so many investors are shorting the stock.
In reality, there are two threats with Westport that bears have their eyes on.
The first is the fact that the company doesn't actually manufacture its engines, it partners with others to do so. That means that if an original equipment manufacturer had the technology to build its own natural gas engine, it could bypass Westport. In fact, that's just what happened -- to an extent -- to Westport's arrangement with engine maker Cummins (NYSE: CMI ) .
The other concern is that business seems to be slowing in the industrial sector, which is where Westport counts many of its customers. Terex (NYSE: TEX ) , for instance, doesn't necessarily use natural gas engines, but recent news of slowed business was seen as a bellwether, and sent shares of Westport lower.
Going after the shiny stuff
McEwen mines for gold, silver, and copper on its properties in Nevada, Mexico, and Argentina.
Unlike larger mining counterparts like Molycorp (NYSE: MCP ) , McEwen doesn't get much love. It's important to note that the company is scarcely followed by Wall Street. The estimates given in the chart above are for the full 2012 fiscal year, and not just the closing quarter. This is because there simply aren't any analysts who bothered to make predictions on a quarterly basis.
The stock has taken many heavy swings this year. In March it fell sharply even though there was upbeat news from its silver mines in Argentina; it rebounded nicely in May when gold and silver prices rose; and it did the same thing in August when gold prices rose.
Clearly, an investment in McEwen is about two things: faith in the price of these commodities rising, and faith that the company will be able to mine them successfully. I'm no expert in the field, but the shorts are clearly voicing their opinions.
A better way?
When it comes to industrial and energy companies, there are choices out there that don't have quite the same volatility baked into them. Our brand new special free report, "The One Energy Stock You Must Own Before 2014," highlights a natural gas stock that only has a short ratio of 1%. To find out what the stock is, get your copy of the report today, absolutely free!