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Key Earnings Reports This Week

NEW YORK (TheStreet) -- Second-quarter earnings season officially kicks off after the bell Monday when Dow component Alcoa (AA) releases its quarterly results.

On Friday morning, another Dow component will report: JPMorgan Chase (JPM). We will also hear that morning from another too-big-to-fail bank, Wells Fargo (WFC).

I'm going to discuss the key issues for these companies' earnings and how to trade these three stocks based on analysis from my Web site, ValuEngine.

Earnings from Alcoa could be a leading indicator of whether the basic materials sector has built in the weakness in metals prices.

We know that aluminum prices have declined 5.0% over the past three months, and that Alcoa has been adversely affected by slowing economies in Europe and China. So the question is whether any additional bad news is priced into a stock in a sector where shares have on average declined 35.5% over the past year. Reflecting this weakness, the basic materials sector has become 14.5% undervalued, according to ValuEngine.

Alcoa ($8.73) is expected to report EPS of 5 to 7 cents after the close today. The stock is rated a Hold (3-Engine), according to ValuEngine, with a 12-month price target of $9.09. Alcoa stock is down 45.7% over the past 12 months with a five-year average return of negative 29.5%. The price-to-earnings ratio is favorable at 8.7 times forward estimates. The stock ended Friday priced at 75% of its book value.

Alcoa has a positive daily chart profile. It ended Friday above its 21-day simple moving average at $8.63, but below its 50-day and 200-day simple moving averages at $8.82 and $9.66. My monthly value level is $8.08 with my quarterly risky level at $9.78.

When you look at the finance sector you see stocks that on average are down just 1.4% over the past 12 months and up 15.3% year to date. ValuEngine shows the finance sector 4.9% overvalued.

The clouds overhanging the too-big-to-fail banks differ significantly for JPMorgan and Wells Fargo.

JPMorgan Chase ($33.90) is expected to report EPS of 82 cents before the market opens Friday, but I am not confident in that estimate, as investors will be on pins and needles as the bank discloses its "London Whale" derivatives loss. This trading loss was originally pegged at $2 billion, but recently I read that industry estimates have ballooned to $9 billion.

Another unknown is whether JPMorgan Chase will discuss its knowledge of the Libor pricing scandal, which so far has adversely affected Barclays (BCS), with German banking officials now looking at potential Deutsche bank (DB) involvement.

Another possible discussion might be JPMorgan's submission of its "living will," which I discussed in my article last week, "Too-Big-to-Fail Banks Submit 'Living Wills'.

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