How to Trade This Week's Earnings

MINNEAPOLIS (Stockpickr) -- Without knowing any better, one could look at the market returns for the past week and think that nothing much happened. A fractional net loss for the period masked significant volatility that traders could exploit for quick profits.

In reality, there was much going on, much of it confounding to the so-called experts. Stocks traded down hard one day and up significantly another. The rest of the time was spent recovering, not knowing which way we were headed.

For those looking for clues, my earnings preview can serve as playbook for the week ahead. In fact, last week one of our suggested plays would have netted double-digit gains.

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Urban Outfitters ( URBN ) kicked the week off with earnings that beat estimates by a penny. I suggested that investors should trade expecting strong numbers to push shares higher. Sure enough, that penny beat, despite a decrease in gross margins, was enough to push Urban Outfitters to a gain of 10% for the week.

Nordstrom ( JWN) reported earnings after the bell on Monday. The company actually beat expectations for the period, but its guidance for the year was less than what analysts expected. On Tuesday, shares of Nordstrom fell by 4.5%, taking some of the steam out of a stock that had been steadily higher just as I had predicted.

Last, but certainly not least, was the disaster that was Central Garden & Pet ( CENT). I told traders to be careful with this value trap, with the most likely outcome being an earnings miss. I did not expect the miss to be as significant as it what transpired.

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After the market close on Thursday, Central Garden posted a loss of 2 cents excluding items. Analysts were predicting a profit of 14 cents. Shares plummeted to a 13% loss on Friday.

Where will the action happen this week? The market itself may be in a state of flux, but there is always action, and looking at the earnings calendar is a great place to start. Here are my thoughts on this week's companies scheduled to post results.

Brocade ( BRCD)

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The communication and data storage company, set to report today after the market close, is expected to post a profit of 13 cents for the quarter ending in October. Over the last few quarters, the company has met or beat expectations. Profits during that period have been consistently the same as well, perhaps explaining why shares have been drifting lower for much of the last year.

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I don't see much of a catalyst here. With the stock up more than a dollar, or some 20%, this stock is set up to fail with earnings. Look no further than what transpired with Cisco ( CSCO) earlier this month.

If Cisco's poor results are indicative of industry weakness, Brocade could be in trouble. This is a real opportunity to trade this stock. I'd bet on an earnings miss and a 5% to 10% loss in the stock.

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Hewlett-Packard ( HPQ)

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Hewlett-Packard, also expected to report today after the close, has endured a bit of an unexpected soap opera with the loss of its CEO. An unplanned event such as a forced resignation can negatively impact operations. Prior to the news HP was doing quite well.

Within that dynamic is a market environment whereby the influence of the personal computer may be on the decline. Apple's ( AAPL) dominance in personal electronic devices has helped in its battle against the PC.

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Dell's ( DELL) recent earnings may foreshadow trouble for HP. That said, HP shares trade for a very attractive valuation. Do we have another value trap like we did last week with Central Garden & Pet?

I don't think so. The circumstances are far different. Shares of HP have fallen hard since peaking earlier this year. In other words, the negativity about the company may already be priced into shares.

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What I would look for with HP is an earnings surprise to the upside. The company is pretty adept at managing Wall Street expectations and a miss here would be a real surprise.

I think you can safely trade HP long in advance of earnings. The stock could move as much as 5% higher if they manage to beat estimates.

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Jack in the Box ( JACK)

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Fast food restaurants are on the rise. Tight consumer budgets make affordable food fare more attractive. As a result, stocks such as Jack in the Box, which is expected to report earnings after today's closing bell, have enjoyed a very good year, with strong performance to the upside.

That strong performance has come despite two big earnings misses in the last two quarters. Those are glaring misses that put next week's release in the spotlight. Will the company meet the current expectation of 36 cents a share?

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90 days ago, that estimate was 52 cents. Add in the fact that rival Wendy's/Arby's ( WEN) posted weak results last week and the ingredients are in play for Jack in the Box to disappoint. Have the estimates come down far enough?

That is the million-dollar question. Certainly a lower hurdle is helpful to the prospects for the stock. At the same time, the stock has moved smartly off previous. As for valuation, the stock is cheap.

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I'm getting mixed signals on this one, but given what I see in shopping malls and other restaurants, the odds are strong for a beat for Jack in the Box. I would trade accordingly.

-- Written by Jamie Dlugosch in Minneapolis.

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

Jamie Dlugosch is a founder and contributor to MainStreet Investor and MainStreet Accredited Investor. Formerly, he was president and CEO of Al Frank Asset Management. He has contributed editorially to The Rational Investor, The Prudent Speculator, Penny Stock Winners and InvestorPlace Media.

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