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MINNEAPOLIS (Stockpickr) -- If you have been trading stocks during the current earnings reporting season, it has paid to be on the short side of the equation. Late last week alone, two apparel retailers, Gap (GPS) - Get Free Report and Aeropostaleundefined, both reported weak results. Both stocks lost more than 14% each on Friday.

That is a tremendous amount of value lost, but it should not surprise anyone following earnings closely. The beat-the-number game on Wall Street, whereby stock prices swing wildly based on a company's earnings results compared with analyst estimates, is alive and well. Pricing stocks in this way is far from efficient, but it happens time and time again.

When the analyst is accurate with his or her predictions, a stock's price tends to be less volatile. When the analyst predictions are wildly inaccurate, volatility increases greatly. This dynamic occurs because valuations depend on the discounting of future profits. The market obtains those future profit numbers from Wall Street consensus estimates.

It can be highly effective and profitable, then, to understand how the game works. Traders who can accurately anticipate a stock's given performance against the number theoretically have an edge when trading stocks in advance of earnings. If the anticipated results transpire, big dollars can be made in a short period of time.


5 Rocket Stocks With Growth Potential

For example, during last earnings season, I suggested selling shares of Aeropostale short. Since an established trend, especially in retail, often holds for several quarters, last week's results and subsequent drop could have been entirely predictable. Once again, the company's earnings report proves that Aeropostale is in decline.

Looking forward to the week ahead, here is a preview of

companies reporting results

and some trends to keep an eye on should you desire to trade stocks in advance of earnings being released.

OmniVision Technologies

The boom in smartphones and tablet computers is boosting revenue and profits for camera maker

OmniVision Technologies


. On Thursday, the company reports results for quarter ended April 30. Investors should expect big things.

Based on results for


(AAPL) - Get Free Report

, the assumption follows that OmniVision will also beat analyst estimates in this period. Over the last year, the company has done just that, including a huge beat in the quarter ending Jan. 31.

For the current period, analysts are looking for the company to make 65 cents per share. For the full year ended April 30, the estimate is for a profit of $2.47. Analysts expect a jump of 14% in profits to $2.82 a share in 2012.

Since the company announced that it had beat estimates in the prior quarter, shares have traded sideways. If the company beats again, look for shares to move higher. With the stock trading for just 14 times 2011 estimates and 13 times 2012 estimates, a significant beat could result in a share price move higher of 5% to 10%.

American Eagle Outfitters

Shares of

American Eagle Outfitters

(AEO) - Get Free Report

, one of the

20 highest-yielding retail stocks

, lost more than 7% on Friday thanks to the weakness in Aeropostale and Gap. The company reports results for the quarter ended April 30 on Wednesday. Apparently investors are expecting the worst.

That makes sense given the tepid operating performance at American Eagle over the last year. The company has met analyst expectations in each of the last four quarters, including the proverbial beat by a penny in the most recent quarter. For the current quarter, Wall Street is looking for American Eagle to post a profit of 15 cents per share.

For the year ended Jan. 31, 2012, the estimate is for a profit of $1.01 per share. After the selling on Friday, shares of American Eagle trade for only 13 times that number. For the fiscal year, 2012 the estimate is for a profit of $1.15 per share, a 14% improvement over the current year.

Given the ability of the company to match expectations consistently, I would expect a similar result when the next report is released. With a relatively inexpensive valuation relative to expected growth, recent selling appears to be overdone.

One big bet on American Eagle comes from

Richard Perry's Perry Capital

, which initiated a 1.3 million-share position in the stock during the first quarter.

Take-Two Interactive

Video game software company

Take-Two Interactive

(TTWO) - Get Free Report

is growing rapidly. Investors will get to gauge that growth when the company reports results for the quarter ended March 31 on Tuesday. In each of the last four quarters, Take-Two has blown away analyst estimates.

With that performance, shares of the company have jumped by approximately 50% over the past year. Take-Two will have to deliver big results to keep the momentum going, especially considering negative sentiment in the stock market. For the quarter, analysts look for the company to lose 41 cents per share. For the full year ended on the same March 31 date, the estimate is for a profit of 86 cents per share.

Analysts predict that Take-Two will grow earnings from the current year to next year by 33%, putting the profit for the year ended March 31 at $1.15 per share. You can buy that growth today for just under 20 times the 2011 estimate and 15 times the 2012 estimate. If the company delivers the goods, the likelihood for a big stock pop is quite high.

Take-Two, one of Sterne Agee's

12 top consumer stocks for 2011

, received a vote of confidence in the first quarter from

Carl Icahn's Icahn Capital Management

, which maintained a 9.8 million-share stake in the stock. Roberto Pedone recently highlighted Take-Two as one of

five stocks setting up to break out


Brown Shoe

When trading earnings reports, I like to look for stocks that have recently missed estimates. In those cases the market will often overshoot its mark providing an opportunity for an upside surprise. To the extent a company can match or beat estimates the next time around big profits can be made.

Brown Shoe


, one of the

top-yielding specialty retail stocks

, is just such a company. The old-line shoe company reports earnings results for the quarter ended April 30 on Wednesday. This will be the first report since the company greatly disappointed investors with a big earnings miss last quarter. After that report, Brown Shoe lost approximately 25% of its market cap.

Despite the poor performance and the subsequent ratcheting down of Wall Street estimates, analysts still have Brown shoe poised for growth. The company is expected to make $1.25 per share in the current fiscal year ending January 31, 2012. That number grows by 18% to $1.48 per share in the following year.

Investors can buy that growth for less than 9 times current-year estimates. In the case of Brown Show it may pay to disregard the poor operating performance of the prior quarter. If the company gets back on track to greatly reduced estimates, the stock could jump.


Another shoe company stock to trade in advance of earnings is


(DSW) - Get Free Report

. The discount seller of shoes would appear to be in the sweet spot of the economy. Tight budgets require consumers to search for bargains. Those offering the bargains such as DSW are positioned well for future growth.

Analysts expect DSW to report a profit of 75 cents in the quarter ended April 30. Over the last year, the company has bested analyst estimates in three of the last four quarters. The only disappointment was in the last quarter, when DSW missed estimates by 3 cents per share.

Despite the miss, shares of DSW have traded higher over the last few months but remain a few dollars below their

52-week high

. For the year ending in January 2012, analysts expect the company to make $2.70 per share and $3.15 per share in the following year.

Investors can buy that 17% growth for 16 times current year estimates and 14 times following year estimates. With pressure on consumers to save money, I expect DSW to beat estimates. In addition any strength in the market should bode well for traders of DSW stock.

Jonas recently highlighted DSW in "

Debt-Free Stocks Could Get Squeezed Higher


To see these stocks in action, check out the

5 Earnings Trades

portfolio. And for more earnings stocks, check out the

10 Stocks to Watch This Week


-- Written by Jamie Dlugosch in Minneapolis.


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At the time of publication, author had no positions in stocks mentioned.

At the time of publication, author had no positions in stocks mentioned.

Dlugosch is the editor of Penny Stock Winners. He has over 20 years of experience in financial markets including investment banking, equity analysis and research and money management. In addition to being the Editor of Penny Stock Winners, he is also a Contributing Editor of and founder and editor of The Rational Investor.