Tuesday’s Post-Earning Movers: Are Any Worth Buying?

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 the early performance of Tuesday’s top movers following earnings. Then I am trying to determine whether or not the moves are warranted and if future gains are present.

Shorts Get Burned After Earnings

There’s nothing I like more than when a stock with high short interest forces those shorts to cover and the stock rises. On Tuesday, we saw this with U.S. Silica Holdings (NYSE: SLCA) after the company reported earnings that beat expectations. The company met bottom line expectations with an EPS of $0.41, but with growth of 42% year-over-year (yoy) it beat the top line by a considerable margin. Furthermore, the company’s overall sales volume increased 10% and its contribution margin was up 32% yoy.

This is a stock that had more than 44% of its float short and has been quite volatile for most of the last year. Yet because of its short interest, the stock is cheap, with a price/sales of just 2.38 and a forward P/E ratio of 12.87 despite growth of more than 40%! Honestly, I don’t know what short sellers seek in a stock, because this stock has all the factors you seek in a great value investment. Therefore, I’d buy, even after its 17.82% gain on Tuesday.

Steep Fall Despite Decent Quarter

Spreadtrum Communications (NASDAQ: SPRD) announced earnings that beat on both the top and bottom line by a significant margin. The company grew its revenue by 5.7% yoy and guided for revenue that is above the consensus for Q1. Yet despite this strong quarter the stock fell 3.68%, and is now trading with an 11% loss in 2013.

So with such a strong beat, why did SPRD fall lower? Some might have been concerned that the company did see a slight loss in gross margins, and that its Opex grew faster than revenue at 11%. However, it’s not as if this is an expensive stock. Spreadtrum is trading with a P/E ratio below 8.0 and has a price/sales of 1.0. The company has a strong balance sheet with a 32% return on equity. Therefore, I consider the reaction following earnings to be illogical, and believe there is significant value in this stock.

Real Estate and Earnings Push the Dow Higher

The Home Depot (NYSE: HD) had the perfect storm come together when strong data for home builders and home prices combined with its Q4 earnings beat. The company beat on both the top and bottom line, but also increased its dividend by 34%, now paying a forward yield of 2.44%.

The company saw an incredible rise of 7% in comparable home sales and grew revenue by 13.9% yoy due to a continued housing recovery and the impact of Hurricane Sandy. Therefore, it’s hard to make an argument against the company’s strong quarter.

The question now becomes whether or not to invest in Home Depot following its strong quarter, with it trading near all-time highs. In my opinion, now is not the time to buy HD. Sure, the company grew by 13.9% with a 7% rise in comparable store sales, but the company is expecting sales growth of just 2% and has stretched margins to its limit. At some point sales must grow aggressively to match a stock that has doubled since January 2011, and at this point, with a P/E ratio of 22, the stock is too expensive and decent growth is not present.

Casino Shoots Higher… But Should It?

Caesars Entertainment (NASDAQ: CZR) has been one of the better performing stocks in the market during 2013, with its 75% return. The large gains have come as speculation of new gaming licenses and rumors of increased traffic have created optimism. Yet despite strong gains, the stock rallied another 3.59% after trading lower by 6.5% in premarket hours, following its earnings.

For the quarter, Caesars missed bottom line expectations and slightly missed on the top line. The company’s loss widened as impairment charges and lost earnings were felt from Hurricane Sandy. Yet despite these negatives, the company’s call centered around online gambling, and as executives explained the company’s positioning for success, the stock traded higher.

Personally, I would wait for a pullback. The earnings were not great, the gains are all speculative, and all future success is priced into the stock. It’s time for fundamental growth, and a 4.3% yoy loss in revenue is not fundamental growth.

Conclusion

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), with one scenario being earnings. For many investors, chasing these trends is common, even addicting, and very few are capable of realizing their losses because of their occasional gain.

Investors need to avoid this behavior after earnings, and look not at the performance of the stock but rather the significance of the news. 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 Home Depot. 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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