Investors Should Be Careful with these Stocks Ahead of Earnings

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Earnings season is upon us, the time when three-month trends will be determined. In the process, countless stocks are at crucial levels, and could move greatly in either direction. With that being said, let’s take a look at a few stocks that I consider to be quite risky this week, but could also be quite rewarding.

Netflix (NASDAQ: NFLX)

If I had to pick one stock that I felt was presenting the greatest level of risk for this upcoming week, Netflix would be it. Netflix is at a crucial point, flirting with a massive psychological level of resistance at $100. In the last three months the stock has rallied more than 50%, but is trading with a near 100% premium from its 52-week lows.

What concerns me is that much of its rally has been a result of speculation, rumors from famed investors, and new content deals. Therefore, I am not certain that the speculation will reflect as fundamental gains. On the other hand, this is a stock with 24.3% of its float being short, so any positives for the quarter could create a massive short squeeze. As a result, Netflix will be among the most watched stock when it reports on Wednesday.

Delta Air Lines (NYSE: DAL)

With a price/sales of 0.32 and a forward P/E ratio of just 5.38, Delta Air Lines is a significantly undervalued stock. The company has made many strides over the last year in improving customer satisfaction and becoming more efficient. Therefore, some are expecting a big beat from the quarter when it announces earnings. The company is expected to post earnings of $0.28 per share, and many believe that lower fuel prices combined with higher fees will bode well for the airline company.

The other side of the trade is that maybe strong earnings are already priced into the stock. In the last two months DAL has rallied over 45% because of the catalysts mentioned above. However, we must remember that super-storm Sandy grounded airlines by almost 20,000, and with expectations being so high it is very possible that Delta experiences a sell-off following its quarterly report.

Celgene (NASDAQ: CELG)

Celgene crossed the $100 mark for the first time on Friday, and has now rallied more than 27% since the new-year. The company has already updated guidance, which led to its gains, saying that income should be at the top range of its previous guidance. Therefore, with double-digit growth, it’s very possible that CELG trades higher after it reports on Thursday.

My only problem with Celgene is that with it priced at $100 it has reached the price target set forth by most analysts, and is now much more expensive compared to the traditional large pharma companies. For example: Pfizer, Bristol-Myers, and Johnson & Johnson all trade with price/sales ratios of 3.0; CELG is more than twice as expensive with a ratio of 7.77. Therefore, because it’s more expensive, its expectations are higher. So although the company could still trade higher, this earnings report does look like a good opportunity for a pullback.

Starbucks (NASDAQ: SBUX)

Starbucks got hit hard last year after rallying 600% in the three years prior -- it fell from over $60 to $43. Now, the stock has recovered, and has trended higher since it was pushed lower because of slowed growth. Yet despite its fall, the stock still trades with a P/E ratio of more than 30 and operates in an industry where prices are rising and demand is falling. Therefore, I say to watch the stock closely, and be prepared for either large gains or devastating loss following its announcement on Thursday.

Conclusion

In my opinion, each of these stocks is a high-risk/high-reward investment prior to earnings. I’m not suggesting that none are worth buying, but rather that investors should be careful with these four stocks during this upcoming week. However, if any do fall by a significant margin, then it might present a good opportunity for the long-term investor.


BrianNichols has no position in any stocks mentioned. The Motley Fool recommends Netflix and Starbucks. The Motley Fool owns shares of Netflix and Starbucks. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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