Monday, April 7, 2008

Earnings Etouffe Candidates

Since today officially kick-offs earnings season, I thought I'd go back to my first recipe, Earnings Etouffe, to see if we can't come up with some candidates for this strategy. The essence of this strategy is to identify companies who have raised guidance and then either buy the stock or buy call options on them. The stock or option is then sold just before the earnings release date. (For more info, see Recipe #1.)

Although there have been many companies that have recently raised guidance, the following table lists the ones that I felt had the most compelling releases, meaning that they raised guidance significantly more than most. Note that the earnings date followed by an “a” means that the company will be reporting after the market closes; a “b” means that they'll be reporting before the market opens; and a “u” means that the date is still unconfirmed. Companies will issue press releases to state exactly when they expect to report earnings, so if the date is unconfirmed, keep checking their press releases.

Which ones do I like? All the companies listed above have been doing well, and I'd be a buyer on any sort of pull-back. The only stock that concerns me at the moment is FCN. It's been in a down-trend for the past week and is closing in on its $62.75 support level. If it breaks that, then I'd wait until it turns around. Also, the chart of MANT shows recent volatility despite its long-term upward bias so if you want to play this stock, I'd wait for it to swing down to the $42-43 level. All of the above stocks are optionable except for PPO, and if you do decide to go the options route, make sure that the stock has liquid options (open interest > 100-200).

Note that this strategy is really only as good as the overall market. If indeed this is the beginning of a bull market, the likelihood that this strategy will pay off increases along with the strength of the bulls.

Now go out there and whip up some earning etouffe!

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