It’s earnings season, which means that investors and analysts are focused, laser-like, on companies announcing their recent results and future expectations. Everyone focusing on the same thing inevitably translates into big moves on big volume.
Dolby Laboratories (DLB) gapped up 17% Friday after it reported impressive earnings and good news, while InvenSense (INVN) fell almost 23% after management lowered their forward outlook.
For short-term traders, those big moves are opportunities. But getting in place to ride big winners like DLB means suffering through a few INVNs too. If you’re cut out for it and it works for you, great. But it’s certainly not a system for everyone.
That doesn’t mean the rest of us should ignore earnings-related moves. Stocks that have just reacted favorably to their earnings announcements can actually make great investments.
A lot of investors look at a stock that’s just gapped up hugely and kick themselves for missing the boat. But they haven’t! Big gaps up after earnings are often just the beginning of a long upmove.
For example, Parexel International Corp. (PRXL) is a biopharmaceutical company that was recommended in the Investment Digest way back in February 2010, shortly after it gapped up 8.5% on earnings.
As you can see in the chart above, over the next few months PRXL gained an additional 30% or so (not including the 8% gap up). Investors who bought in after earnings enjoyed all of those gains.
In a more recent example, Apple (AAPL) gapped up from below 425 to above 450 after raising forward guidance this January.
Investors who thought they missed the boat there and stayed on the sidelines would have watched investors who bought in after earnings ride the stock up almost another 40%.
Of course, not every gap up is going to be followed by those kind of returns. Stock selection (based on other factors) is still going to be important. And it’s worth noting that both the examples above already had upward momentum going into the gap. But the bottom line is that you don’t have to be a day trader to benefit from earnings gaps—you can buy after the gap. The gap is often just the beginning, not the end.
As for today’s stock, you could do worse than trying to buy Dolby Laboratories (DLB) on a slight pullback from its new highs. DLB has spent the last few months building a very firm looking base, and the company’s announcement that its technology will be included in Microsoft Windows 8 means lots of royalties for Dolby going forward.
Alternately, take a look at Ariba, Inc. (ARBA), which popped up 11% on earnings April 27. ARBA was recommended by Mike Cintolo, editor of Cabot Top Ten Trader, on April 30, the following trading day, and Investment Digest subscribers received the recommendation in the next day’s Daily Alert. Here’s what it said:
“Even in today’s world of smart phones, tablets and high-speed networks, most business commerce is still conducted manually and with paper invoices and payments. Ariba, Inc. (ARBA) is changing all that, aiming to be something of a business-to-business eBay or Amazon; the company bills itself as the world’s leading business commerce network where firms of all sizes can connect to their suppliers online. ...
“The potential going forward is truly enormous; Ariba’s network handles $300 billion of transactions every year, but that’s just 10% of what its current customers spend in B-to-B transactions, so even if no new customers are inked there’s still plenty of upside. ...
“ARBA had a fairly persistent advance from late 2008 (at 6) through July of last year (to 37), but it was hit hard by the market’s mini-crash and has been base-building ever since—at least it was until last week, when the company’s stellar earnings report caused shares to erupt to new highs on more than five-times average volume.
“To be fair, ARBA has never been an institutional darling, but it’s possible the stock is beginning to ‘grow up’ and we like the look of last week’s breakout. You can buy some here, and we suggest a loose stop around 34. Buy Range: 37-39.5.”
Since that recommendation, the stock has been consolidating its gains just under 40, and still looks buyable here.
And if you think I’m recommending a ship that’s already sailed, wait two months, and then get back to me.
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