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The Cat is Out of the Bag; Can You Still Make a Trade? + Vic Wisemann’s Thoughts on: WFC, MS, MCD, DAL, AMR, FSLR, SBUX, GG, DIS, XTO and More...

Vic Wisemann
InvestorsObserver
Featured Contributor

Earnings are shaping up to be better than expected in the first quarter, compared with the previous quarter, as bank results stabilize. But profitability remains well below pre-recession levels. Forecasts for the second and third quarters show a steady improvement in earnings before analysts see a return to positive growth, hand in hand with an economic recovery, in the last quarter of 2009.

The quarterly results hint at signs of recovery, but the picture remains very murky. It's unclear if the banks at the heart of the meltdown are seeing better results because the worst is over or due to the benefit of new accounting measures. And some retailers, who are the litmus test of consumer spending, say the worst in their earnings reports may be over but only due to tighter inventories, job cuts and store closures.

Read on to see how you can still play earnings, even after the announcement is made.

With more than half of S&P 500 companies having reported so far, things appear better; or, more appropriately, not quite as bad as we thought. Data on the S&P companies shows an average annual percentage decline in the mid to upper 30's in first-quarter earnings, compared with a 67 percent drop in fourth-quarter profits. Even within industries, the reports were a mixed bag.

Wells Fargo & Co (WFC) set the tone in the financial sector when the company previewed its earnings a week early with a surprising record profit. But many of the financial companies' results were marked by odd accounting twists that kept many investors skeptical about the industry's health.

Citigroup Inc. (C), for example, posted a much smaller first quarter loss to common shareholders than analysts predicted, but only after reporting a $2.7 billion accounting gain because the value of its debt on the market fell. Essentially, the bank benefited because bond traders lost confidence in the bank's creditworthiness during the first quarter. The opposite happened to Morgan Stanley (MS). The investment bank had to take a larger-than-expected first quarter loss because the value of its debt gained in the market.

In the technology sector, one of the highlights came from Apple Inc. (AAPL), where strong iPhone sales helped boost quarterly profit 15 percent. But more often the recession took its toll, even on names like Google Inc (GOOG). The company's profit rose 9 percent for the quarter because of cost-cutting, but revenue grew at the slowest rate in Google's history as a public company.

For many companies the better results came from job cuts and store closures during the quarter, rather than more sales. For example, in restaurants, eat-in chains like the Cheesecake Factory (CAKE) reported better than expected profits as sales slid because it was able to offset sales and traffic declines with cost cuts. Meanwhile, fast food chain McDonald's Corp. (MCD) saw its first-quarter profits climb nearly 4 percent, as more customers worldwide came to them for a lower priced meal.

The larger airlines again posted losses for the quarter, although not as bad as analysts expected. Delta Air Lines (DAL) and United Airlines (UAUA) lost $1.2 billion between them and American Airlines (AMR) lost $375 million. But low-cost carriers like JetBlue (JBLU) and AirTran (AAI) managed to post profits.

The airlines saved on fuel costs, which were almost half what they were a year ago in some cases. But fewer passengers on fewer planes kept revenue down. And many were hurt by fuel hedges, paying higher prices they had locked in last summer.

Chief executives from many companies have all couched their comments by saying that given the economy, they were pleased with results.

Often we try to open trades prior to earnings to take advantage of higher volatility due to uncertainty regarding what will be reported. This uncertainty leads to higher volatility and increased option prices. We can, however, make some very nice trades after a company has reported earnings and the uncertainty comes out of the stock. There are several in this latest round which have moved higher, or at least stayed flat, post earnings and present some nice opportunities.

First Solar (FSLR), the nation's largest solar panel maker, reported first-quarter profits that more than tripled as the company inked numerous new power projects and cut its production costs. The company reported $1.99 per share in the first quarter, compared with 57 cents per share for the same period last year with revenues hitting $418.2 million for the quarter, up from $196.9 million during the same period last year. Analysts had expected earnings of $1.50 per share on sales of $403.67 million.

Starbucks Corp. (SBUX) said its fiscal second-quarter profit dropped 77 percent because of big restructuring changes related mainly to the closure of 123 U.S. cafes. Starbucks’ reported earnings fell to 3 cents per share from 15 cents per share a year earlier, with net revenues falling to $2.3 billion from $2.5 billion.

There were one-time restructuring charges of $152.1 million in the quarter that were partly associated with closing the company-operated stores. Excluding costs related to closing stores during the quarter, Starbucks earned 16 cents per share -- slightly above analysts’ expectation of 15 cents per share. Despite the less-than-stellar report, the stock has held onto gains made over the past two months.

Goldcorp (GG) topped expectations with 27% profit growth in its first quarter. The company reported net earnings of 40 cents a share. Excluding special items, which include lower taxes in the quarter, the company said its adjusted earnings were 23 cents a share, even with the year-earlier period. That was 10 cents better than what analysts were expecting. After building support over the past months, share values moved higher after the announcement.

Walt Disney Co. (DIS) said its fiscal second-quarter profit fell 46%, again on restructuring charges, decreased advertising sales and a decline in DVD sales. The company said it earned 33 cents a share compared with a profit of 58 cents a share in the same quarter a year earlier. Disney said that excluding items, it would have earned 43 cents a share and analysts had expected the company to post a profit of 40 cents a share. DIS surged higher following the earnings announcement. It appears the stock has run into resistance at the higher level but, on the plus side, looks like it is building up support at the higher levels.

XTO Energy (XTO) said first-quarter net income came in at 83 cents a share compared to 93 cents a share in the year-ago period. Revenue rose to $2.16 billion from $1.67 billion and analysts expected the company to earn 78 cents a share on revenue of $2.07 billion. After the announcement, the stock stayed relatively flat, allowing recent gains to remain in tact.

Any of these present an opportunity to take advantage of some relative stability in a turbulent market. With these stocks, spread trades give the opportunity to build in some hedge against large price changes and still get a decent return. By entering the trade after earnings have been announced, we are able to take advantage of some price stability while still getting significant protection.

For a hedged trade on GG, look at the July 25/22.50 Bull Call spread for a $2.15 debit. That's a 16.3% return and the stock has to fall 19.9% to cause a problem.

Remember, these trades are only for that portion of your portfolio dedicated to shorter- term trades. Do your homework before you enter any trade and have a little fun.