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Where Can You Find Interactive Profits This Earnings Season? + Vic Wisemann’s Thoughts on: AA, IBM, INTC, EBAY, AMZN, IACI

Vic Wisemann
InvestorsObserver
Featured Contributor

It’s earnings season once again. Those two words elicit a wide range of emotion from investors throughout this chaotic market. Depending on where you stand, earnings season can be a blessing or a curse.

For the promoters, salesmen and pundits, earnings season is an electrifying time where individual stocks move dramatically and anticipation and excitement reign supreme. It can generate some of the most energetic trading on the slightest bit of news or even opinion.

For those who have long-term horizons and believe short-term equity movements are immaterial, earnings season is a curious spectacle of froth and frenzy. The “buy and holders” watch the display in disbelief, if they even care, and wonder what's the big deal?

For professional fund managers running other peoples’ money, earnings season can be downright terrifying. A larger than proportional share of professional money runners are creatures of the herd; they pile much capital into the same relatively few huge-cap companies. If the earnings for those companies are less than optimal, the majority of fund managers get hit at the same moment in time.

These moves can be detrimental to the market as a whole, as well as the specific funds involved. There tends to be a mudslide effect; when one fund starts to slide, they all tend to slide. This is what we saw with the funds full of mortgage-backed securities.

Read on to see what Internet content company can boost your profit this earnings season.

When one started to fall, they all began to panic and started selling everything they could to generate cash to cover for the mortgage losses. When the other funds saw things falling, they started selling, too, and the whole merry-go-round went happily on its way.

This earnings season is off to a pretty good start with companies reporting close to expected results. As always, Alcoa, Inc. (AA) got things started this quarter. The company posted a positive surprise of 31% over the consensus estimate by reporting a loss of only 26 cents per share. Revenue also beat analysts' expectations and forward-looking statements maintained a forecast for an industrywide demand contraction of 7 percent this year. Not a stellar report, but no confidence-shattering statements either.

Another big name reporting positive results was International Business Machines Corp. (IBM). IBM posted a positive surprise of 14% over estimates and revenue only slightly below expected levels. The real story, however, was the company’s outlook. They projected per share earnings well ahead of estimates. The combination sent the stock higher.

Intel (INTC) released earnings and knocked the cover off the ball, beating on revenue, non-GAAP earnings and gross margin. This guidance beat is only an illusion, of course, as it ignores the $1.45 billion fine that Intel had to pay to the European Union. This positive news, however, gave strength to the bulls that the economy may be heading back up, or, at a minimum, stabilizing.

The recession continued to hurt eBay Inc. (EBAY) in the second quarter, as earnings and revenue fell amid a drop in sales in the main online marketplace, overshadowing growth in the PayPal online payments and Skype communications units. For the third quarter, eBay expects revenue slightly above analysts' estimate. The stock moved up sharply following the announcement.

As you can see, earnings announcements can have a huge impact based not only on the current earnings, but revenues and projections as well.

There are a number of things to look for when these companies report, the least of which is the actual earnings number. Revenue plays a big role and it is not uncommon for a company to hit its earnings number on lower-than-expected revenues. When this happens, the market usually views it as a negative, and reacts poorly for the stock.

What the company says about future earnings is also very important. If a company reports better-than-expected earnings or higher revenue, but projects lower future earnings, the stock will typically fall. Sometimes these falls are steep and long lasting, depending on other conditions in the market at the time of the announcement.

Keeping all this in mind, what can you do before earnings to maximize your returns?

In the Internet services sector, among the well known and heavy hitters like Amazon.com (AMZN) and eBay, there is a smaller company with its fingers all over the net. IAC/InterActiveCorp. (IACI) is a well-run Internet content business which operates in the US and internationally. The Internet conglomerate owns more than 35 web companies, including search engine Ask.com, local guide CitySearch, dating site Match.com, home service provider network ServiceMagic, and online-invitation firm Evite. Formerly a jumble of disparate assets that included cable-TV networks, travel services, and mortgage lending, the company has slimmed down to focus on the online search and content market. To achieve this goal, it split into five public companies in 2008, with IAC retaining the web properties.

The company reports earnings before the market opens on July 29th. For a hedged trade on IACI, you may want to consider the October 15/12.50 Bull Put spread for a 25 cent credit. That's an 11.1% return, and the stock would have to fall over 16% before the position was in trouble.

With earnings season, anything is possible. Keep a close eye on a few stocks you think are poised to jump or fall on earnings and get your trade in before they report. Remember, you may be wrong or the market may not react as expected, so don’t bet the house.

Earnings season is an exciting time for any investor and can generate some sweet returns for you, even when the company news is not great.

f you have had any additional thoughts, ideas or exciting earnings stories, please e-mail vwisemann@InvestorsObserver.com.