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Are There Still Good Earnings Trades Out There? + Vic Wisemann’s Thoughts on Covered: GOOG, AAPL, MSFT, EBAY, TTWO, ATVI, ERTS, GS, SYMC and More...

Vic Wisemann
InvestorsObserver
Featured Contributor

As quarterly financial reports start to pour in from IT bellwethers like Google (GOOG), Apple (AAPL), Microsoft (MSFT) and eBay (EBAY), industry insiders are not worried so much about what happened last quarter as what's in store for the rest of the year.

Judging from results so far, as well as some industry reports on the PC sector, the first quarter went about as badly as, and in some cases a little better than, expected. What's more important, there are signs that some sectors of IT have hit bottom for the year.

Read on for the tech outliers that can still put profits in your portfolio.

In a sign that the recession is taking a bite out of Google, considered practically an unstoppable force in search advertising, revenue for the company declined from the last quarter of 2008 -- its first sequential revenue decline ever. Revenue for the first quarter was $5.5 billion, up 6 percent from last year but down slightly from $5.7 billion in the fourth quarter last year.

However, Google also reported that its first-quarter net income increased to $1.4 billion from $1.3 billion in the same period a year earlier. Excluding one time items, earnings per share were $5.16, handily beating expectations of analysts, which were $4.93.

Though the revenue decline shows that top line growth is slowing, investors pushed up company shares after the announcement. One reason why some investors may not be too worried about the sequential revenue decline is that Google at some point has to succumb to the law of large numbers: Essentially, the larger a company is, the harder it is to maintain top line growth, especially in a recession. The better-than-expected profits also were cause to cheer.

Apple's turn in the earnings confessional showed a $1.21 billion profit during the company's second quarter. This was a 15% improvement on earnings from the same quarter a year earlier with Macintosh computer sales falling about 11%, and iPod sales were only slightly higher. iPhone sales pulled the company through as Apple sold 123% more iPhone units than it did in Q2 2008.

By having earnings per share of $1.33 this time around and topping analysts' expectations of $1.09 per share, Apple has beaten the Street for at least five consecutive quarters. Whether the company is sandbagging or forecasters simply underestimate the company, the current quarter's estimate of $1.12 per share is likely to be too low again. But that is the topic for another article.

Following Apple's surprise, Microsoft had a surprise of its own. For the first time in MSFT's history as a public company, revenue fell year over year as PC shipments tumbled and earnings sank 32 percent.

The shortfall again illustrated the toll the recession has taken on the world's largest software maker, even though Microsoft remains one of the richest and most profitable companies. In January, Microsoft said it needed to resort to its first mass layoffs, cutting 5,000 jobs. Microsoft did not issue earnings guidance for the rest of the year, and it offered no hope for a rebound in the current quarter.

With the numbers for the big boys already out, some are looking to other sectors or even to next quarter. This would be foolish and short sighted since there are still some profitable earnings plays to make in the tech arena. Since there have been some hits and misses as well as a lack of conviction going forward, option premiums on stocks yet to report will be high.

Video games are typically one of the safe havens for investors in economic downturns. The industry, though, is hardly recession proof, as many have called it. Recession resistant, perhaps, but it’s not immune to reduced spending.

The economy’s not entirely to blame here. It’s just as much the fault of a blockbuster 2008. Last March saw the release of Nintendo's "Super Smash Bros. Brawl," which ended up becoming one of the year's best-selling games. And Take Two Interactive (TTWO) released “Grand Theft Auto 4” in April, which doesn’t bode well for next month’s comparisons. The music genre also isn’t the powerhouse it was a year ago, which could have implications for Activision (ATVI) and its “Guitar Hero” franchise. Electronic Arts (ERTS) could suffer as well if “The Beatles: Rock Band” proves to be too pricey for the mass market.

Activision, however, does appear well positioned and it was recently upgraded by Goldman Sachs (GS) and S&P. Despite the year-over-year comparison issues, the company is expected to have some of the best-selling franchises with Call of Duty and World of Warcraft in addition to Guitar Hero. These should generate strong recurring subscription revenues and the company will benefit from continued growth of online gaming.

Another outlier to peek at is Symantec Corporation (SYMC). With overall IT spending expected to decline at a single-digit rate in 2009, customers are seen delaying new projects and the sales cycle will lengthen. Earnings, which come out Wednesday, could also be hurt by unfavorable foreign exchange due to the rising value of the Dollar. However, the security software sector will be less affected than other sectors in IT because of its mission-critical nature.

Of the tech outliers yet to report, there is a nice put credit spread on SYMC. Look at the May 15/12.50 Bull Put spread for a 20-cent credit. That's an 8.7% return in less than two weeks, and the stock has to fall more than 13% to cause a problem.

Take your time and analyze the trade before you put your money at risk. Not all trades are for right for all portfolios.