5 Stocks for Opportunistic Earnings Traders

MINNEAPOLIS (Stockpickr) -- They say market participants are gluttons for punishment. Indeed, even in this rollercoaster market, investors keep coming back for more. While the economy may be sluggish, the search for profits continues. Greed is alive and well, thank you very much.

Stocks ran the table last week, with five straight days of gains. Fears of imminent collapse in Europe were temporarily on the back burner. But what happens today? Stocks plunge at the open on fears of a collapse in Europe. The rollercoaster continues.

Are you confused yet? You are not alone. Even the pros are flummoxed by this market. On the surface, it would appear that we are left to simply guess where the market will go. On a daily basis, the uncertainty is remarkable.

Related: 9 Small-Cap Stocks With Positive Earnings Trends

Of course, guessing the direction of markets or stocks is a sure way to lose money. Instead, traders would be wise to take advantage of uncertainty by exploiting pricing inefficiencies. The best way to do that, in my opinion, is to trade stocks of companies set to report earnings.

One of my picks last week was Diamond Foods ( DMND). On Friday, the stock soared 11.59% thanks to a strong earnings report and upbeat guidance for the future. No mention of Europe fears here in this individual name that greatly outpaced the market.

This week, a good number of heavily traded and recognizable stocks report results. My goal here is to identify the gems that are likely to beat expectations with share prices that are artificially low. With that, here are five stocks for opportunistic earnings traders.

AutoZone

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When trading earnings, the key is to place the trade in the session just prior to earnings being released and then close the trade the next day after the news is released. A highly correlated market means shares can slip back to previous levels or lower if the overall market is trading lower. It is best to just lock in your gains and move on to the next trade.

This happened recently with a trade I suggested of Pep Boys (PBY). Buying before the news and then selling the next trading session generated a gain of 8% in less than 24 hours. In subsequent days of trading, Pep Boys slipped below the original buy price.

AutoZone ( AZO) reports results this Tuesday before the bell, and I expect a similar pattern to what transpired with Pep Boys. AutoZone has had a solid run on an operating basis, beating the average Wall Street estimate easily in each of the last four quarters. That includes a beat in the quarter ended May 31, a period that included supply disruptions due to the earthquake in Japan.

With further distance from that very significant event, look for AutoZone to continue its impressive profit march. The average Wall Street estimate for the period ended Aug. 31 is for $6.97 per share, only 3 cents per share higher the estimate 90 days ago.

For the full year ended on the same day, the company is expected to generate a profit of $19.21 per share. In the next fiscal year, profits are expected to increase by 15% to $22.03 per share

With the stock trading for 17 times current-year estimated earnings, a win this period against the Wall Street average estimate will have investors cheering. I would trade looking for gains similar to Pep Boys', but remember: Those gains might not last, so lock in your gains quickly.

>>Practice your stock trading strategies and win cash in our stock game.

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Bed Bath & Beyond

Retail stocks are at the epicenter of market speculation regarding a double-dip recession. Many retail stocks have been sold heavily given fears of a slowing economy. With consumer spending likely to slow should those fears materialize, profits in the retail space are at risk of a decline.

One stock bucking the trend is Bed Bath & Beyond ( BBBY). The seller of housing goods sold off with the rest of the market in July, but a strong rally since mid-August has shares trading 2% higher from the close on July 15. Helping support the stock was a Wall Street upgrade from Cowen to outperform from neutral.

Over the last four quarters Bed Bath & Beyond has exceeded average Wall Street estimates of earnings, including a 9 cent per share beat for the quarter ended May 31. For the period ended Aug. 31, the average Wall Street estimate is 84 cents per share. That estimate is 2 cents higher than it was 90 days ago.

For the full year ending Feb. 28, 2012, the company is expected to make $3.68 per share. In the following year, that number grows by 15% to $4.23 per share. At current prices, the stock trades for 16 times current-year estimated earnings.

Previously we saw shares of Ulta ( ULTA) spike when that company reported results that beat estimates. At the time, shares of Ulta traded for 34 times current-year estimated earnings, which were expected to grow by 25%. I expect a similar reaction in Bed Bath & Beyond when the company reports results on Wednesday after the market closes.

Bed Bath & Beyond is one of the top holdings at Steve Mandel's Lone Pine Capital, as of the most recently reported period.

CarMax

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Sometimes stock investors make things much too complicated when all that is needed is simple analysis. Case in point is CarMax ( KMX), a very large retail seller of used cars. The company reports results for the quarter ending August 31 on Thursday before the market opens. During the period to be reported, demand for pre-owned cars was strong.

When demand is strong, prices go up. Almost all business owners know how to increase prices when people are buying. If demand for used cars is going up, CarMax is likely to do well. In the last quarter, when the demand for pre-owned vehicles was beginning to rise, CarMax beat average Wall Street estimates for profits by 8 cents per share.

Analysts must not have been impressed since estimates for the quarter to be reported have barely budged. The average estimate today is 51 cents per share, compared with the average estimate of 50 cents per share 90 days ago. At the same time, shares of CarMax have sunk 17% since early July.

It makes no sense. This one is simple: Wall Street is likely to be too conservative with its expectation for profits at CarMax. With the stock down significantly since a very good quarterly report, the stage is set for a strong rally on a good report. Macro conditions being what they are in the used car market, the odds of a beat here are quite high.

CarMax is one of the top holdings at Chuck Akre's Akre Capital Management, comprising 4.7% of the total portfolio as of the most recently reported period.

FedEx

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On Thursday, market participants will get a good read on the strength of the economy when FedEx ( FDX) reports earnings results for the quarter ended Aug. 31. The transportation sector is considered to be a leading indicator on economic activity. Weakness in FedEx results will reinforce those betting on a double-dip recession, but a good report will do the opposite.

In the quarter ended May 31, FedEx was dealing with headwinds of a slowing economy and higher jet fuel prices. The company managed to beat expectations by 3 cents per share. This quarter, fuel prices have eased and economic activity appears to be similar to that of the prior three months. In other words, another beat of estimates is likely here.

For the current period, the average Wall Street estimate is for FedEx to make $1.48 per share. Ninety days ago, the estimate was $1.41 per share. For the full year ending May 31, 2012, FedEx is expected to make $6.47 per share, with that number growing 17% to $7.59 in the following year.

With shares trading for just 11 times earnings, FedEx is a stock to own in advance of earnings. The odds of a beat are high and the valuation is low. That is a perfect setup for an earnings trade.

FedEx, one of TheStreet Ratings' top-rated freight services and logistics stocks, shows up on a recent list of Jim Cramer's Good-News-in-Trucking Stocks.

Nike

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Shares of athletic wear retailer Lululemon ( LULU) sank after the company reported results that beat expectations but included guidance that was less than what Wall Street expected. Could the same fate hit Nike ( NKE) when the company reports results for the quarter ended Aug. 31 on Thursday after the market closes?

Investors do not seem particularly concerned. Shares of Nike have rallied strongly after the July swoon. The stock is now down only a few dollars from its July highs.

Wall Street analysts may have a different opinion. Estimates for the current period have dropped by 8 cents per share over the last 90 days.

For the year ending May 31, 2012, the average Wall Street estimate for Nike is $4.83 per share. The next year, profits are expected to increase by 16% to $5.60 per share. With shares trading for only 18 times current-year earnings estimates, a strong report will send Nike shares higher.

I would side with investors on this one.

Nike shows up on a recent list of 10 Stocks That Avoid the September Slump.

-- Written by Jamie Dlugosch in Minneapolis.

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To see these stocks in action, visit the 5 Stocks for Opportunistic Earnings Traders portfolio.

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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