How to Play Friday’s Earnings Reactions Long-term

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

We saw some big moves following earnings on Friday, and this leaves investors wondering what moves to make next. Therefore, I am looking at the biggest movers, explaining why they moved, and then what to do next.

QLogic Corp (NASDAQ: QLGC)

The most impressive reaction following earnings was most likely by QLogic. The stock is currently trading higher by almost 15% after beating expectations on both the top and bottom line. Furthermore, the company guided for next quarter revenue and EPS that was above consensus, sparking a rally in the oversold stock.

There’s no denying the fact that QLogic did beat expectations, however the beat was not that impressive. It posted $119.4 million in revenue, a $2 million beat, and an EPS of $0.20, which was $0.02 above consensus. Therefore, I am not sure the reaction properly reflects the report. In addition, the company’s revenue represents a 16% year-over-year loss due to storage adapter card and controller chip sales falling hard. With that being said, there’s no way that I could buy after this jump, and do not see value in the stock.

Informatica (NASDAQ: INFA)

Much like QLogic, I don’t understand the reaction following Informatica’s earnings report. The stock jumped 11% with a massive top and bottom line beat but grew revenue by just 3% year-over-year. This is a company that is trading with a P/E ratio of 40 and a price/sales of 4.45, therefore an 11% jump on 3% revenue growth is a tough pill to swallow.

After further consideration it is possible that notes regarding Facebook being a buyer of its PowerCenter Big Data Edition and Microsoft’s Server & Tools sales might have played a role in the reaction. This is a company that many believe has a lot of potential so possibly investors were reacting to other factors. At this point, I don’t know, it’s simply hard to justify, and not worth the risk.

Halliburton (NYSE: HAL)

While I didn’t understand the reactions from Informatica and QLogic, to me, Haliburton’s 5% gain made perfect sense. The company was expected to post an EPS of $0.61, but beat the number by $0.06 and also crushed top-line expectations by $230 million. This comes as a great surprise since everyone had already known that there would be weakness in the company’s North American completion and production business. However, international growth is expanding far beyond expectations and the company now looks poised to continue this growth. Therefore, it might be a good buy for a company that looks fairly priced.

Starbucks (NASDAQ: SBUX)

Starbucks traded higher by 4% after reporting earnings that were in-line with expectations. The company saw revenue growth of 11% and comparable store sales that were 6% higher. While these numbers are good, it was strong growth in China, impressive K-Cup shipments, and encouraging guidance that pushed the stock higher.  The company is now trading with a forward P/E ratio of 21.50 and a price/sales of 3.0, therefore it’s not cheap. As a result, I think the stock is fairly valued, and would hold but not buy it, as we wait to see how Chinese growth will develop.

Procter & Gamble (NYSE: PG)

P&G’s analysis is easy, I say buy it!  This is a stock sitting at new 52-week highs, but remains undervalued with revenue growth of 3% year-over-year. The company raised guidance, beat both top and bottom line expectations, and most importantly, it did not whine about the effects of hurricane Sandy. This isn’t a stock that is going to double in the next year, but it could return 15-20% with a 3.0% yield.

Conclusion:

It’s very important that investors be very careful when buying or selling after a company reports a market moving quarter. Far too often investors try to chase gains or get suckered in by the prospects of immediate returns. This is something that I have discussed in detail, and is a significant psychological point of weakness for many retail investors. Instead, perform thorough due diligence, read the earnings report without looking at the performance of the stock, and then make a decision as to whether it fits into your portfolio. 


BrianNichols has no position in any stocks mentioned. The Motley Fool recommends Halliburton, Informatica, Procter & Gamble, and Starbucks. The Motley Fool owns shares of Halliburton 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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