Daily Market Inefficiency Report

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

When I was the editor for my newsletter, The Rational Investor I urged my subscribers to exploit market pricing inefficiencies for maximum profits.

Every single day there are events that transpire and result in momentary irrational moves in share price for individual stocks in the market.

With my blog here on the Motley Fool, I will publish my thoughts on some of the biggest movers in the market and what investors should do going forward. Whatever the case may be there are buy and sell opportunities that can help give your portfolio an edge in your relentless search for superior profits.

Here are a few of the things I’ve seen recently:

Just Like the Good Old Days for AOL

On-line pioneer AOL (NYSE: AOL) reported earnings results for the quarter ending September 30 on Tuesday morning before the market opened. The company announced that it made a profit of 22 cents per share in the third quarter easily surpassing the average analyst estimate of 17 cents per share. AOL also surpassed estimates on the top line. The company generated total sales of $531.7 million versus an estimate of $521.6 million. The strength of the report comes mainly from increases in advertising revenue. Subscription revenue fell during the quarter, but at a rate that was lower than prior periods. Shares of AOL were up over 13% in mid-afternoon trading on Tuesday.

Buying AOL at current levels would be a big mistake in my opinion. Looking closely at the numbers, I see a business heavily reliant on spending during a national election campaign that has been most contentious. Investors should be thinking of AOL as an advertising media play. As such, paying a premium valuation would make no sense whatsoever. The barriers to entry are minimal and ad spending could shift dramatically at any moment. AOL looks to be hitting a peak.

AOL represents a short selling opportunity. Shares are likely to drift lower after recent strong gains. Advertising revenue gains may prove to be temporary and the subscription business is still in decline.

Changing the Way an Industry Does Business

The on-line real estate company Zillow (NASDAQ: Z) reported earnings results for the quarter ending September 30 on Monday after the market closed. The company announced that it made 7 cents per share in the quarter. That result matched the average analyst estimate of 7 cents per share. Revenues beat expectations as sales came in at $31.9 million versus an estimate of $31.7 million. Zillow provided guidance for the remainder of the year stating that revenue in the 4th quarter would be in a range of $30 to $31 million. Current estimates for 4th quarter revenue are at $32.5 million. Zillow noted that it recently lost a key display ad customer in the form of Foreclosure.com. That was enough to send investors into a tizzy. 

I knew investors were crazy, but the action in Zillow only confirms just how crazy they can be. By all accounts the news from Zillow was relatively tame. They met earnings estimates and beat revenue estimates. Oh, sure the forward guidance was lower than expected, but not by much. You can’t tell me the market is efficient when a stock went down 18% on that kind of news. It makes no sense. Rational investors can pounce on this one. Zillow is expected to grow profits at a huge rate in the next fiscal year. You are dealing with a fast growing company here. Everything is not going to be perfect or always pretty. Citigroup came out Tuesday morning defending the company to no effect. No worries, shares are only going higher from here in my opinion. This one is easy: buy today for a likely gain that will easily surpass what the average index is going to give you.

Buy shares of Zillow at these discounted prices. This one is a game changer in a monster industry. This sort of dip presents a wonderful entry opportunity.

Ride this Roller Coaster to Profits

Information technology and services company Computer Sciences (NYSE: CSC) reported earnings results for the quarter ending September 30 on Tuesday morning before the market opened. The company announced it made a profit of 58 cents per share excluding certain items. Analysts were looking for a profit of 49 cents per share in the quarter on average. Revenues missed expectations. The company generated sales of $3.85 billion versus an estimate of $3.88 billion. Computer Sciences raised guidance for its fiscal year 2013 to a profit range of $2.30 to $2.50 per share. Current analyst estimates are calling for a profit of $2.29 per share in fiscal year 2013. Shares of Computer Sciences jumped nearly 20% in trading on Tuesday.

Computer Sciences is a volatile stock after it reports earnings. Shares have jumped or dropped by 5% or more each time it released estimates in the last year. In the last 2 quarters after shares popped on earnings, the stock drifted lower. Look for the same here. The report was good, but weak on the revenue side. Raised guidance helps matters for sure, but its valuation might be getting a bit extended. Shares currently trade for 15 times the mid-point of the new guidance for fiscal year 2013 earnings. While analysts expect profits to jump by double digits, there is not much room for error. I would play the reversion to the mean here with a short sale. The stock is likely to fall over the next few months.

Fool blogger Jamie Dlugosch does not own shares in any of the companies mentioned in this entry. The Motley Fool owns shares of Zillow. Motley Fool newsletter services recommend Zillow. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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