Which of These Stocks Are Worth Buying Post Earnings?

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

Friday produced volatility in some of the biggest names in the market. This movement came after earnings, and in this piece, I am looking to see if any of these stocks are a buy?

Mobile’s not good for everyone!

Google (NASDAQ: GOOG) fell 5% after earnings, but has since recovered, trading with a loss of just 2%. The company slightly missed on the top line, but with an EPS of $9.56, it was $1.22 short of expectations.

The biggest problem in the quarter was ad prices, as cost-per-click fell 6% year-over-year; this was most likely due to mobile producing lower ad rates. Google’s site revenue, which is almost 70% of total revenue, grew 18% year-over-year.

Overall, I think the company’s growth is strong, but I do worry about pricing and its ultimate impact on margins. This quarter served as evidence that the shift to mobile is impacting Google’s bottom line. At 5.5 times sales and 26 times earnings, I do think there are better opportunities elsewhere (i.e Apple).

Simply too many questions

Microsoft (NASDAQ: MSFT) fell a whopping 12% on Friday, as earnings were far short of expectations. However, the $34 billion in lost market capitalization wasn’t just because of the quarterly miss, but also due to the uncertainty surrounding Microsoft’s Windows division.

The Windows division, specifically its OEM revenue, which makes up 65% of overall revenue, is expected to fall in the mid-teens for the upcoming quarter. The company continues to struggle with issues in pricing its Windows for smaller devices, which is playing a role in the decline.

Moreover, $0.07 of the company’s $0.09 EPS miss was caused by a $900 million charge taken on by Surface RT inventories. At 16 times earnings, I don’t necessarily think that Microsoft is expensive, but still feel as though there are too many questions to comfortably initiate a position.

Buyback, not earnings, is the real catalyst

Schlumberger (NYSE: SLB) was our first look at the energy space, and it was a good one. The stock is trading higher by nearly 6% after posting revenue growth of 8.1% year-over-year and pre-tax operating income gains of 12% year-over-year.

The company’s quarterly report did create some of the movement on Friday, but not all of it. The real catalyst was a newly approved $10 billion share repurchase plan. Investors have been asking for this new plan, but I do worry that with a 35% payout ratio (earnings returned to shareholders), there's not enough that is being invested back into the company. With that said, I think the quarter was solid, but I think a better pricing opportunity could present itself in the future.

Investing for the future

General Electric (NYSE: GE) created new multi-year highs after reporting earnings, trading higher by almost 5%. The quarter itself was in-line with expectations, as revenue slipped 4% year-over-year.

The big news for General Electric lies in its company presentation and its conference call, which is why you shouldn’t react to initial top and bottom line numbers. In the call, GE disclosed that its backlog has risen $7 billion to an all-time high of $223 billion. This is encouraging for the future. In addition, total orders are beginning to grow faster, and with a 50 basis point rise in margins, investors were quick to reward the company with strong post-earning gains.

Personally, I love this quarter. I have criticized GE for the last two years for being more of a financial company versus an industrial company. The company’s strong backlog shows that GE financial is no longer as important to the future of the company. Therefore, at 18 times earnings, I can consider buying GE, but not for now, but rather as a long-term investment.

Final thoughts

In my book, Taking Charge With Value Investing (McGraw-Hill, 2013), I spend many chapters talking about earnings, and teaching investors how to use earnings to their advantage. One of the key rules is to never buy in the first hour after earnings are announced, and to always listen to the conference call and read the entire report.

In the case of GE, we see why these rules are important, as deeper analysis is what created gains on Friday. Therefore, with this lesson learned, keep it in mind throughout this earnings season, and don’t be so quick to react after earnings are announced. 

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Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Google. The Motley Fool owns shares of General Electric Company, Google, and Microsoft. 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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