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OPINION

Earnings Season Warning Signs

The opinions expressed by columnists are their own and do not necessarily represent the views of Townhall.com.
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What are the warning signs that a stock might get hammered on earnings? Charles has three things for you to watch out for to evaluate stocks that might have a major negative reaction on their earnings report. Last week there were many stocks that got hammered for missing earnings.

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If you’re holding a stock into earnings and two of these three things are problematic you should consider closing the position or taking a defensive position.

Last week two names stood out among many that were hammered for missing earnings.

Poor Execution

The inability to produce earnings that beat Wall Street consensus is usually a red flag that brings harsh reaction to underlying share price.

Earnings Estimates Trends

Consensus estimates drifting lower reflect concern that the company will not live up to earlier estimates.

Broken Chart

Stocks begin to break down well before “bad” news is announced.

Elizabeth Arden (RDEN)

  • Missed 2/4 prior earnings releases
  • Estimates were drifting lower
  • Chart was a red flag after reaching a double top on November 27 at $39.64 it drifted to under $35.00

Lulu Lemon (LULU)

  • Was beating The Street although nowhere near the margins of previous years
  • Estimates were drifting lower
  • Stock hit $76.57 on October 3 then proceeded to come down hard from a series of miscues to land at $58.00 before posting results last week.
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Note: Sometime these three things can look great in two of these measures and the company can still miss earnings and the stock gets hammered. Last week Best Buy (BBY) earnings estimates were trending higher, management had crushed consensus estimates but the stock was breaking down.

  • Peaked November 11 at $44.33
  • January 3 closed at $40.68
  • January 13 closed at $36.00

In this case common sense might have been your best reason for not being in the stock. In one year the stock rallied 295%. Easy to figure maybe it was ahead of the fundamentals…or logic.

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