Earnings Trades for the Week

MINNEAPOLIS (Stockpickr) -- Last week, geopolitical risk returned to the market in full force. Televised violent demonstrations in Egypt shook investors to their core and stole the headlines from what has been a strong earnings season for companies trading on U.S. exchanges.

Stocks dropped across the board on Friday as investors speculated that unrest in Egypt could result in higher oil prices, transportation uncertainty with the possible closing of the Suez Canal and fears that tension would spread to other countries.

Within the drama, there are always individual stories for traders to exploit. Last week's trade of the week was Eastman Kodak ( EK). The company was hit by a double whammy of disappointing earnings and negative ruling with respect to a lawsuit against smart phone makers regarding how photos are delivered on handheld devices. Shares of Kodak fell by more than 20% after the news.

Related: Rocket Stocks for the Week

Altria ( MO) met expectations, and as a result, shares traded flat after the report. In a world of uncertainty and greater geopolitical risk in the market, Altria may be a good hiding place. The company will make its money no matter what transpires around the globe.

AT&T ( T) lost more than a dollar per share last week after its earnings report. The company beat estimates in the period by 1 cent but offered disappointing guidance for the future citing the impact of competition for the ever popular iPhone. In response, the company stated it would focus on Android-based phones going forward. Good luck with that.

Caterpillar ( CAT) had a great earnings report and its stock moved higher as a result, but only slightly. The company stood pat on expectations for the current year. Investors yawned.

JetBlue ( JBLU) posted disappointing results thanks to higher fuel costs. The discount carrier's performance sent the entire airline sector lower. If you were looking for a good time to exit the group, now would be it.

This week brings another full slate of companies reporting results. The numbers may be less in focus given unrest in Egypt, but those companies that miss expectations are likely to be punished in the current environment.

Here's how to trade a few of the names reporting next week .

Broadcom

Broadcom ( BRCM), a semiconductor company in the wireless communication space, has enjoyed a wonderful recovery from the depth of the recession. Shares have tripled in value since bottoming in 2009. The popularity of smartphones has helped spur a new upswing in the space that bodes well for the company and its chips.

What happens next is uncertain. Stocks are taking a breather after a big run-up in 2010. Chip stocks in particular seem to be forming a base at two-year highs. It will be up to operational performance to help spur the next leg up.

In the case of Broadcom, analysts expect the company to make a profit of 74 cents as share in the current quarter. Over the last year, the company has beat expectations rather handily. The most-recent quarter will likely continue that trend.

That performance may already be priced into the stock. Shares of Broadcom trade for approximately 15 times 2011 estimated earnings. Analysts expect the company to grow profits by single digits during the forthcoming year. The current valuation is steep given future growth.

The only way for the stock to continue its current ascent is to beat earnings by a wide margin. What is the likelihood of that transpiring? Add in the geopolitical risk of Egypt this week and the possibility of a correction in Broadcom is the more likely outcome.

I would trade accordingly.

As of the most-recent reporting period, Broadcom comprised 3.2% of Louis Navellier's portfolio at Navellier & Associates. It's one of Goldman's eight top tech stocks for 2011, and Dan Burrows of DailyFinance included it as one of six stocks to consider for revenue growth.

Baidu

Unlike many momentum stocks, shares of Baidu ( BIDU) have held up relatively well in 2010. Thanks to Google's ( GOOG) decision to protest Chinese censorship, the China search engine has been on a straight path higher. At this point, investors are on the momentum train.

Where it will stop is anyone's guess. If earnings matter, we will get an idea of the power of Baidu next week when the company reports results for the quarter ended Dec. 31, 2010.

Analysts expect the company to make a profit of 46 cents a share in the period, which would put profits at $1.48 a share for the year. Those same analysts expect the company to grow profits by 62% in 2011 to $2.40 per share.

That kind of growth is powerful stuff. No wonder shares of Baidu trade for 72 times 2010 earnings and 44 times 2011 profits. I would pay just about any price for the stock of a company growing earnings at that rate on a consistent basis.

The problem, of course, is that such growth is never sustainable. The company is also benefiting from the absence of competition. That may or may not be the case going forward.

In China, anything is possible. The rational side of me says to be careful, but there is a very real chance that this company will blow away estimates, just as Google did. I would play the stock that way, looking for a big beat and a 10% gain in the stock as a result.

As of the most-recent reporting period, Baidu comprises 2.2% of Ken Fisher's portfolio at Fisher Asset Management and 0.7% of D.E. Shaw's. According to Karvy Global, it was one of the top 10 emerging-markets stocks in 2010, and Michael Shulman of InvestorPlace recently listed it as one of nine cult stocks investors should avoid.

Brightpoint

Brightpoint ( CELL) has been on fire in the last few months. Shares are up more than 50% since last September thanks to third-quarter earnings that greatly exceeded expectations. Can the cell phone supply chain manager maintain the momentum?

A 6-cent beat of estimates in the third quarter resulted in analysts boosting expectations for the fourth quarter. The current expectation is for the company to announce a profit of 27 cents per share, 2 cents higher than estimates at the beginning of the quarter.

Shares currently trade for 11 times 2010 estimates and 10 times 2011 estimates. Analysts expect profits to improve by 10% in 2011. On the surface, if the company meets expectations, shares are fairly priced.

Given the strong results in the third quarter, Brightpoint is likely to beat expectations for the fourth quarter. Even though estimates are a bit higher, the bar is still set pretty low for the company. A strong consumer and improving economy bode well for the company.

In addition to current results, investors will be looking for guidance in 2011. Since shares are trading at a fairly low multiple to earnings, reduction in future guidance is not likely to impair current share price.

Traders should expect strong results from Brightpoint and shares to trade higher as a result. The stock deserves more than current estimates. A good report will be the boost shares need to trade higher. Look for a gain of 3-5% in shares after earnings are announced.

For more stocks reporting earnings this week, check out the Earning Trades portfolio.

-- Written by Jamie Dlugosch in Minneapolis.

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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 InvestorPlace.com and founder and editor of The Rational Investor.

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