Are Any of these Stocks Worth Buying After 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 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 with high profile earning releases. Then, I am determining if any might be attractive to “buy”.
Still Investing With Caution
The beaten down biotechnology stock Dendreon (NASDAQ: DNDN) traded particularly volatile on Monday after reporting earnings that beat expectations. The company saw growth of 51% and of course posted a net loss. The company’s largest segment, community accounts, grew 58% year-over-year (yoy) and urology grew 25% over last quarter. Dendreon also added 61 new accounts, bringing its total to 802 infusing accounts.
While the quarter itself was good, the big news was that the company completed enrollment in its sequencing study with Zytiga, the other high-profile prostate cancer treatment. This is a company that continues to look more attractive, as COGS are lowered and accounts are added.
My fear is that the company will never become profitable, seeing as how it posted a yearly loss of more than $300 million. However, the company has a price/sales below 1.85 and should have enough financing to operate for one additional year, long enough to determine its future. Therefore, a small investment might be wise due to such encouraging developments, although I’d watch it closely.
The Beginning of a Downtrend?
Lowe's (NYSE: LOW) traded lower by 2% on Monday, after announcing earnings that beat expectations. The company’s comparable store sales rose 1.9% and gross margins also increased five basis points. The company authorized a new $5 billion buyback program and sees same store growth of 3.5% in 2013 with 10 new stores being opened. Overall, it looks like a fairly solid quarter.
So why did Lowe's trade lower despite a good quarter? The answer lies in its valuation. This is a company that is trading with a higher P/E and price/sales multiples than it was back during the housing boom. The company’s valuation has risen steadily over the last few years as it and The Home Depot have slightly grown sales while drastically cutting costs to improve margins. In my opinion, Lowe's is at a point where it must grow sales, and until that happens, the stock is too expensive and I’d expect a pullback.
3D Printing Sees a Pullback
Shares of technology company 3D Systems (NYSE: DDD) traded lower by more than 7% on Monday following a mixed earnings report. The printing company beat on the bottom but missed on the top line, then issued guidance that some considered mixed. The company’s decline in gross margins and its 70% increase in R&D spending were the most criticized on the company’s call, as some think its run might be coming to an end.
Sometimes a pullback is healthy and is good for a stock. The company is now trading with a price/sales of 6.0 and a forward P/E ratio of 22.50 after reporting earnings. I have been critical of the stock’s valuation for the last three months, and although I think it’s expensive, I think its growth validates the valuation. This is still a fast-growing company and let’s not forget that it has been at the epicenter of acquisition rumors. Therefore, it might be wise to use the pullback as an opportunity.
In my book, Taking 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, or avoid when it trades lower. 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 3D Systems and Lowe's. The Motley Fool owns shares of 3D Systems and Dendreon and has the following options: Short Jan 2014 $55 Calls on 3D Systems and Short Jan 2014 $30 Puts on 3D Systems. 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!