Three Stocks that Could Pull Back After Earnings this Week
Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Earnings often dictate the trend of a stock for the following three months. So far this year earnings have been strong, with 63.1% of companies beating top-line expectations and 62.2% beating the bottom line. Furthermore, stocks on average are making a 0.77% move higher after earnings, which are also connected to the performance of the overall market. However, with the market posting one of its worst days of 2013 on Monday, it’s possible that market perception may be changing, and here are three stocks I’d be wary about ahead of earnings this week.
A Lot of Questions for this Dow Component
Walt Disney (NYSE: DIS) has outperformed the Dow Jones by four-fold over the last year and is somewhat expensive compared to the market. The stock has been pushed higher over the last year due to strong performance from its ESPN segment. However, with expectations for all segments being high, and a stock that has outperformed the market, I’d watch for a pullback after earnings.
Disney is expected to post an EPS of $0.76 when it reports today. But more importantly than its top and bottom line numbers will be its guidance and updates on projects. The market already expects momentum from all of its segments, following recent investments into theme parks and resorts. It will be interesting to see if the company has been able to turn these investments into profits, and if new plans for Pixar and Marvel will be warmly welcomed by Wall Street. The stock is now flirting with all-time highs and if earnings are strong it’s sure to create new highs, but if weak then we could see a significant correction.
Recent Catalyst Not Yet Reflecting on Fundamentals
After a gain of more than 70% over the last few months, investors will now turn to fundamentals for Alcatel-Lucent (NYSE: ALU). The company remains undervalued but has rallied thanks to recent financing and a restructuring plan that could strengthen the company long-term. In the past investors expected horrible earnings from Alcatel-Lucent, but now after strong results from other companies in the space, there are many who expect a beat from Alcatel on Thursday.
An increase in CAPEX spending might help Alcatel to exceed low expectations. The problem is that these expectations are now rising thanks to bullish stock performance and earning reports within the industry. So far, Alcatel is yet to see a pullback, and the outlook for strong earnings might be a little premature. This is still a company with significant operational issues, and although CAPEX from telecom companies are increasing, Alcatel still faces hurdles with unprofitable segments of its business. I am a big believer in the re-emergence of Alcatel, but I think earnings could be a good opportunity for a decent pullback.
Closing of Plant Could be a Good Indication of Poor Performance
Coinstar (NASDAQ: CSTR) has seen a 7.5% decline over the last five sessions as the market braces for a weak earnings report. For the last year it has been no secret that its DVD business is declining but there is now a belief that the decline is more rapid than expected. Last week the company announced that it was shutting down a North Carolina assembly plant, which leads me to think that demand in the DVD rentals must be declining. The company might try to spin this news as a re-focus on streaming, but the news itself could cause temporary weakness when earnings are announced on Thursday
The reaction following earnings is for the most part a psychological response, and is sometimes not accurate with the progress of a company. Just last week Facebook traded lower after blowing past expectations, as did Seagate Technologies. Therefore, a stock trading lower after earnings doesn’t necessarily mean that it was due to a bad quarter, but rather the market responded badly. With that being said, each are good companies, and if a pullback does occur, investors should use it as an opportunity to invest.
BrianNichols is long ALU. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of Walt Disney. 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!