Key Earnings Reports This Week

NEW YORK ( TheStreet) -- Second-quarter earnings season officially kicks off after the bell Monday when Dow component Alcoa ( AA) releases its quarterly results.

On Friday morning, another Dow component will report: JPMorgan Chase ( JPM). We will also hear that morning from another too-big-to-fail bank, Wells Fargo ( WFC).

I'm going to discuss the key issues for these companies' earnings and how to trade these three stocks based on analysis from my Web site, ValuEngine.

Earnings from Alcoa could be a leading indicator of whether the basic materials sector has built in the weakness in metals prices.

We know that aluminum prices have declined 5.0% over the past three months, and that Alcoa has been adversely affected by slowing economies in Europe and China. So the question is whether any additional bad news is priced into a stock in a sector where shares have on average declined 35.5% over the past year. Reflecting this weakness, the basic materials sector has become 14.5% undervalued, according to ValuEngine.

Alcoa ($8.73) is expected to report EPS of 5 to 7 cents after the close today. The stock is rated a Hold (3-Engine), according to ValuEngine, with a 12-month price target of $9.09. Alcoa stock is down 45.7% over the past 12 months with a five-year average return of negative 29.5%. The price-to-earnings ratio is favorable at 8.7 times forward estimates. The stock ended Friday priced at 75% of its book value.

Alcoa has a positive daily chart profile. It ended Friday above its 21-day simple moving average at $8.63, but below its 50-day and 200-day simple moving averages at $8.82 and $9.66. My monthly value level is $8.08 with my quarterly risky level at $9.78.

When you look at the finance sector you see stocks that on average are down just 1.4% over the past 12 months and up 15.3% year to date. ValuEngine shows the finance sector 4.9% overvalued.

The clouds overhanging the too-big-to-fail banks differ significantly for JPMorgan and Wells Fargo.

JPMorgan Chase ($33.90) is expected to report EPS of 82 cents before the market opens Friday, but I am not confident in that estimate, as investors will be on pins and needles as the bank discloses its "London Whale" derivatives loss. This trading loss was originally pegged at $2 billion, but recently I read that industry estimates have ballooned to $9 billion.

Another unknown is whether JPMorgan Chase will discuss its knowledge of the Libor pricing scandal, which so far has adversely affected Barclays ( BCS), with German banking officials now looking at potential Deutsche bank ( DB) involvement.

Another possible discussion might be JPMorgan's submission of its "living will," which I discussed in my article last week, "Too-Big-to-Fail Banks Submit 'Living Wills'.

JPMorgan Chase is rated a Hold (3-Engine), according to ValuEngine, with a one-year price target at $34.66. JPM stock is down 14.5% over the past 12 months with a five-year average return of negative 5.2%. The P/E ratio is favorable at 7.1 times forward estimates. The stock ended Friday priced at 99% of its book value.

JPMorgan has a negative daily chart profile, ending Friday below its 21-day, 50-day and 200-day simple moving averages at $34.99, $36.16 and $36.40, respectively. My quarterly and semiannual value levels are $32.85 and $31.00, respectively, with a semiannual risky level at $39.47.

Wells Fargo ($33.05) is expected to report EPS of 81 cents, also before the bell on Friday. This bank was not in the group of financial giants that had to submit "living wills" in the initial go-round.

Wells Fargo is rated a Buy (4-Engine), according to ValuEngine, with a 12-month price target at $35.59. Wells' stock is up 19.8% over the past 12 months with a five-year average return of negative 0.4%. The P/E is favorable at 9.6 times forward estimates. The stock ended Friday priced at 1.63% of its book value.

Wells Fargo has a neutral daily chart profile, ending Friday above its 21-day, 50-day and 200-day simple moving averages at $32.42, $32.34 and $29.64, respectively. My weekly value level is $31.38 with annual, semiannual and quarterly pivots at $32.70, $33.99 and $34.08, respectively, and monthly and annual risky levels at $36.40 and $38.69, respectively. A break below all these pivots indicates risk to my semiannual value level at $25.39 in the second half of 2012.

I advocate the use of good-'til-cancelled limit orders to add to long positions or become less short on share price weakness to the value levels. Traders should enter GTC Limit Orders to reduce the long positions or to add to a short position on strength to risky Levels.

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

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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