5 Stocks to Buy if They Crash on Earnings

NEW YORK (TheStreet) -- As usual, the summer earnings season could set the tone for the rest of the year, or at least the period before the holiday shopping season kicks off.

It's usually a bad idea to make aggressive directional bets on stocks ahead of earnings. You'll hit some winners, but the losers can wipe you out.

I only buy a stock, particularly one that will likely react with volatility on bad news, ahead of earnings if the purchase fits into a long-term series of periodic purchases. Otherwise, I like to hunt stocks that get hit on a weak report and drop considerably afterwards.

Simply put, you're working contrary to the market's impatience or overreaction when you stare into the heart of a hurricane and buy post-earnings weakness.

Intel (INTC), Microsoft (MSFT) and Nokia (NOK)

I group these three stocks together because they have several things in common. In particular, each company has a fair bit riding on the release of Microsoft's Windows 8 operating system. That comes this fall.

Additionally, all three companies could report relatively weak second quarters. Over at Forbes, Patrick Moorhead explains why that is in this defense of Intel Ultrabooks:
Ultrabooks are primarily targeted at the consumer market, secondarily to the commercial market. Each market has different selling cycles of ups and downs. For most regions, the consumer market has three main cycles. First, is "Back to School," which hits primarily in Q3. Then you have "Holiday", which hits primarily in Q4. Then in Q1 you have western markets "Post-Holiday," which hits in January and Chinese New Year in February. Q2 is absolutely the slowest quarter in consumer PCs, and it has been for 20 years. Everyone close to the PC market knows this. That's just one reason why jumping to any conclusions about Ultrabooks based on Q2 are dangerous.

Add in Windows 8 anticipation and you can clearly see why it's too soon to judge not only Ultrabook sales, but practically everything Intel, Microsoft and Nokia have their paws in.

On weakness, I intend to aggressively buy INTC, followed by somewhat less aggressive purchases of MSFT and smaller, speculative shots at NOK. I would put 65% of a pot of money towards INTC, 30% towards MSFT and the remaining 5% towards NOK.


Yahoo! (YHOO) and Amazon.com (AMZN)

Interestingly, Yahoo! and Amazon have a little bit in common. Both companies find themselves in periods of transition that could spook investors, even if temporarily. Of course, there's a significant distinction between the two: Yahoo!'s transition takes place during a period of relative weakness, while Amazon's comes at a time when the company hammers forward on all cylinders.

The two stocks share very few characteristics, though. Consider the following chart, which covers the last two earnings reports, the first of which came in late January for both Yahoo! and Amazon. AMZN Chart AMZN data by YCharts

YHOO has flat-lined in that $15 area for months, whereas AMZN tanked on earnings in January only to rebound with the April report.

I am strongly considering a long play on YHOO. I have even toyed with the idea of buying the stock prior to earnings, but will likely wait. That could be a mistake if entry price matters to you; do not be surprised if Yahoo! announces interim CEO Ross Levinsohn to the post permanently in conjunction with earnings. Many analysts thought it was going to happen last week.

With Levinsohn as CEO, the outcome of Yahoo!'s report might not matter much. It seems as if lots of people, particularly investors, have wanted Yahoo! to make this move all along. Under a Ross Levinsohn regime, we'll see a forward-looking bullish call with Wall Street quite possibly blowing off any near-term weakness as noise.


From there, Levinsohn can focus on the transformation. That would mean doing what Yahoo! should have done years ago -- making itself a digital media company. Levinsohn has started that process, but without "interim" next to his CEO title he can really get to work.

It's a bit imprecise to call Amazon a company in transition. That said, they're working through a process.

The company's massive reinvestment phase does not sit well with many investors. But as the performance of the stock shows, buyers quickly rush in and reverse any post-earnings weakness AMZN experiences. As I explained in a bullish Amazon article last week on TheStreet:
Practically everything Amazon does justifies one end -- to lock more and more people into its ecosystem. And, to forge a stronger bond between the ecosystem and its heaviest users.

Right now, that requires Amazon to spend money to build fulfillment centers, buy content and produce hardware to help grow its e-commerce ecosystem.

History shows that Jeff Bezos knows how to execute this type of long-term strategy. It also shows that, by and large, when a weak report spooks investors, the stock rebounds. It retests its highs. As long as Amazon continues to grow revenues, it's all good. Margin pressure at Amazon should not concern investors in the slightest.

Something else to chew on: Just as Q2 could be slow for Intel and Microsoft due to cyclically weak PC sales, the same could happen to AMZN. Q2 often comes in light in the retail and e-commerce space. Amazon tends not to be an exception.

I classify INTC and AMZN strong buys on earnings weakness, MSFT and YHOO as buys and NOK as a small speculative buy.

At the time of publication, the author was long INTC, MSFT and NOK.

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

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