Gaming the Earnings Season

It’s that time of the year again… and the bear is already starting his feast. But if GE was the appetizer, the main courses are all coming up, on deck this week are some of the leading indicators for the rest of the industries. We have Merrill Lynch, Citigroup, Wells Fargo for the financials, Google, Ebay, IBM to name a few of the tech heavy weights, Caterpillar, Johnson & Johnson, Schlumberger, and a host of others that represent the first wave in this earnings season.

Everyone already knows that the US economy is in a housing induced recession, and the consumers are starting to feel the pinch. This coming week is likely to mirror last Friday’s monumental drop punctuated by bad economic forecasts and reports. So how to play this period of volatility, there are a few sectors that I’m particularly keen on, and I think will bear watching.

First, my favorite, the solar sector, Sunpower, one of the leading solar companies is set to report on Thursday. It will definitely set the tone for the rest of the solar companies, I’m going to guess that its report will be fairly good, but the stock will be slaved to the trends of Wall Street until Thursday. With its recent run up, I think the stock has a high hurdle to clear even with good earnings. So my strategy would look to buy stocks in the sector after earnings come from Sunpower on Thursday. If the earnings are good, the entire sector can go up for a few days, providing an opportunity for a quick flip. Alternatively, if the earnings are bad, it’s a great opportunity to buy in to a good company.

Then, there is Google, if I had the guts, I’d short this stock. My guess is with the consumer weakening at this point, its revenue for click based searches have been dropping. So, when it reports on Thursday, I’m guessing the stock is in for a good drop. Unless they have some other blockbuster news that can divert attention, growth is slowing for Google. This wouldn’t be an opportunity to buy into Google, but it will definitely affect other tech stocks, such as RIM, Amazon, Apple, and depending on the level of the drop, it might be a good idea to get in on those next week, after Apple’s report.

On the financial sector, I expect a slew of bad news on the earnings. I can’t imaging Citigroup, Wells Fargo or any of the others having good earnings. But I think the flip side is that the market may have already factored in the bad news, Citi for example is almost at its lowest point in a decade. So, unless there is another Bear Stearns in the mix, the financials might be a buy at this point on the theory that most of the bad news has been wrung out of that sector. Again, I think the best play is to buy these guys after earnings, Citi has had a nice run up recently, so better to play this one a little more cautiously.

Finally, there is a personal favorite here, Intuitive Surgical, reporting on April 17th. I am personally looking to get into the stock before any announcements. But I have to say, I’m scared. Intuitive is near its all time high, but it’s a great company, has locked in a nice monopoly for its robotic surgery system. The market is expanding, and it’s also got a nice revenue stream in the form of a razor blade model through the selling of disposable parts on its surgical system. What’s not to like here. But if there is a hint of slow growth, then it’s over. My strategy for this would be to hold out until the last day or so before earnings, if it goes down sufficiently, buy it at that point. Then a good earning report should give back some decent gains, even with the recent run up.