How to Trade This Week's Earnings

MINNEAPOLIS ( Stockpickr) -- I'm thankful for a safe and joyous holiday season, but I'm glad to be back at it. Amateur hour is over. With the market grinding to a near halt on minimal volume last week, the professionals return in full force this week.

The last week of trading was not a complete waste of time. We managed to pick another earnings-trade winner with earnings loser Cal-Maine Foods ( CALM), which we recommended investors sell or avoid. As expected, the large egg company delivered earnings that missed estimates by a wide margin.

The company reported a profit of 67 cents a share vs. an estimate for the period of 72 cents. Shares were down approximately 5% on the news. Noteworthy in the report was the news that rising corn feed expense ate into profit margins.

Investors in Cal-Maine can expect more of the same in 2011. The selling may not stop at current levels.

Related: Rocket Stocks for the Week

Our other two recommendations traded sideways due to a lack of catalyst. I still think Finish Line ( FINL) was unjustly punished after Nike's ( NKE) recent earnings report. Longer-term traders may find profits by holding this position over the next week or two.

Retail sales did not disappoint, but there was no bump in J.C. Penney ( JCP)shares. Investors are probably taking a wait-and-see approach before bidding up prices further.

Such is the current state of the market. Investors received few clues during the last two weeks of trading. A positive bias to stocks resulted in one of the biggest December gains in 20 years. Volumes are likely to increase tepidly as investors make the positions known this first week of January.

I remain concerned over rising input prices, but such concern may be longer term in nature. Right now the bias for stocks is to go higher. That alone may make a contrarian cringe, but it also makes it difficult to fight the tape.

With the end of the fourth quarter, earnings season will begin in earnest during the second week of January. Before we ramp up to a large number of companies reporting results, we have plenty of nuggets to chew on this week. Investors could make money trading these names in advance of results.


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Fast food burger chain Sonic ( SONC) -- not to be confused with doppelganger Sonic Solutions ( SNIC) -- reports results for the period ending Nov. 30 on Jan. 4. In mid-December, the company announced that it was buying back some $62 million in debt. Such a move is certainly positive for investors and it has shown in the movement of the stock in the last month.

Shares are up more than 10% in December alone. That said, the gains erased prior losses for the year. Shares of Sonic finished 2010 flat for the year, well behind the double-digit gains for the rest of the market.

Estimates for the current quarter have the company earning 10 cents a share for the period. That number has held steady for most of the last three months. Over the last year, the company missed estimates in three of the four quarters and matched estimates in the fourth.

Combine that shaky track record with a stock that is quite volatile, and traders have an opportunity to capitalize. Current valuation of shares is also a concern. Sonic trades for 19 times forward earnings and 17 times estimates for 2012 earnings, which are expected to grow by 15%.

I've watched this stock closely over the last year because it was one of my Top Stocks to own in 2010. There is a reason it did not make the cut for 2011's list. I expect the company to miss earnings, and I would sell December's gains.


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One of the stocks that did make the cut for my Top Stocks of 2011 is Mosaic ( MOS). Demand for fertilizer combined with takeover prospects bode well for this stock in the coming year. On Jan. 4, we get an early read on my analysis when the company reports profits for the quarter ending Nov. 30.

I'm not alone expecting big things from Mosaic. Shares rose nearly 15% in the last month as investors bid up shares at the end of 2010. The big move puts pressure on shares in the near term.

Will strong results help propel the shares higher? Its recent history is a bit sketchy. Over the last four quarters, the company has missed expectations three times. A miss in the most-recent quarter will give investors pause for the long term.

For the current quarter, the bar has been set pretty low. Analysts expect the company to make 91 cents per share. That is well below the $1 estimate from 90 days prior. Looking beyond the most-recent quarter, analyst expect the company to make $3.84 in the year ending May, 2011 with that number growing by 25% to $4.81 in the following year.

It is that growth that has captured my attention. Shares trade for only 16 times the 2012 estimate. I'd be a buyer no matter what transpires in the November quarter.

Nonetheless, given the low expectations, I am looking for Mosaic to beat estimates for the current period. That should give the stock a good start at the beginning of this new year.

Major holders of Mosaic include Highbridge Capital Management, with a 3.2% position in the stock. Recently, Roberto Pedone flagged Mosaic as one of several ag stocks poised to break out. The stock was also a Fortune top stock pick for 2011.

Family Dollar

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One company not happy to see the recession ending is Family Dollar ( FDO). Family Dollar has thrived in a period of thriftiness. With the recession ending and the consumer strengthening, the end of good times may be nearing.

On Jan. 5, Family Dollar releases results for the November quarter. Analysts expect another home-run quarter of profits. Estimates are for Family Dollar to make 61 cents per share. Will this be another quarter of estimate-beating results?

Investors are skeptical based on current valuation. Shares trade for only 16 times the 2011 estimate and 14 times the 2012 number. Clearly investors believe the company will take a pause here as the economy strengthens. Such an expectation underestimates the company, in my opinion. High unemployment and a weak recovery bode well for Family Dollar's business model. Consumer budgets are still tight. Bargain shopping will be here for some time to come.

As such, look for Family Dollar to beat expectations. Shares will go up as a result.

In the most recent reporting period, Renaiisance Technologies increased its position in Family Dollar by 257.7%, and Lone Pine Capital raised its position by 29%. The stock was one of the 10 top retail stocks of 2010, and with an A+ buy rating from TheStreet Ratings, it's one of the top-rated multiline retail stocks.

To see these stocks in action, check out this week's earnings trades portfolio.

-- 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.