Friday’s Post-Earnings Movers: Is it Time to Buy?

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

Earnings and earning-related news is the number one catalyst for stock movement. A strong quarter can dictate the direction of a stock for the following three months as can a bad quarter; in the past I have written in detail about such subjects, a domino effect following a strong or bad quarter. In this piece I am looking at three stocks that traded with a considerable amount of volatility. Then, I am determining if any might be attractive to “buy”.

Company Provides No Reasons to Buy

Frontline (NYSE: FRO) is currently trading lower by 10% after reporting preliminary Q4 earnings. The company’s weakness goes beyond just top and bottom line performance, as its free cash flow declined 14% year-over-year (yoy) to just $137 million. The company has now said that it will reduce its fleet to save cash and to limit its exposure.

Investors are worried that because of such drastic cost-cutting measures the company will be unable to repay its $225 million convertible bond loan, which matures in April 2015. As of now, there are very few reasons to believe that the tanker market will recover, and if not the company could be looking to restructure its business. As a result, I can’t find any reasons to purchase the stock at this time.

Strong Earnings & Cautionary Guidance Equals Volatility

After trading higher by almost 4% in the premarket, Abercrombie & Fitch (NYSE: ANF) has reversed to trade with a loss of nearly 7%. The company was in-line with top line expectations but blew past EPS expectations. However, flat comparable store sales and  a less-than-stellar outlook for the upcoming quarter outweighed a strong quarter.

For the first time in years, the company increased its dividend, and by 14.3%. This is a stock that is very cheap compared to its fundamentals, and in my opinion, the weak guidance was more of a caution that poor performance is possible. The company has done a great job over the last year at turning its business around, and at these levels, I would buy.

Great Company But Possibly Too Expensive

Sourcefire (NASDAQ: FIRE) announced earnings after the market closed on Thursday, and on Friday the stock rallied higher by more than 13.5%. The company was in-line on EPS but beat on the top line with growth of 27%. The company also issued upbeat guidance for the upcoming quarter and performed well in all measures of its business.

My problem with this stock is its valuation. The company is growing by just 30%, and in my opinion, this level of growth is not enough to validate a price/sales over 6.0 or a P/E ratio over 200. This is a stock with almost 19% of its float being short, therefore much of the gains are most likely a result of short covering, rather than a total reflection of valuation compared to fundamental performance.

Conclusion

In my bookTaking Charge With Value Investing (McGraw-Hill), I examine human behavior and the psychological effects that take place in the minds of investors when a stock shoots higher or falls drastically lower (think roulette at a casino). For many investors, it is very alluring to try and purchase a stock after it reports earnings, and is trading with large gains. However, chasing these trends often create loss, as quite often stocks will trade illogically after earnings. A more efficient practice is to read the earnings report first and then make a decision based on the information within the report. By doing so, you will be able to find the inconsistencies and a distinction between performance and fundamentals, which creates value and allows for large returns. 


BrianNichols has no position in any stocks mentioned. The Motley Fool recommends Sourcefire. 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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