Sell Netflix; Buy McDonald's, Halliburton, Texas Instruments

NEW YORK ( TheStreet) -- The third week of earnings season is now upon us, and investors appear to be bracing for more "Chipotle-esque" surprises.

But if they were paying enough attention, they would have realized that Chipotle's ( CMG) results were not much of a surprise at all. While earnings can be an excellent time to buy undervalued stocks, on the flipside, the slightest miss in execution will punish those who are priced for perfection, as was the case for Chipotle.

This punishment does not necessarily mean that the company is suddenly worse than prior to the announcement. It does, however, bring to the forefront one of the most important aspects of investing: valuation.

In this article, we will to look at four stocks that are currently trading at valuation levels that suggest buying and selling. We are buying McDonald's ( MCD), Halliburton ( HAL) and Texas Instruments ( TXN), while placing a sell order on Netflix ( NFLX). Let's look at the case for each one and see if you agree.

Buy McDonald's

While the news on Chipotle has damaged the restaurant sector, including names like Starbucks ( SBUX), McDonald's should be one of a handful of value alternatives that benefits over the long term. Interestingly, the word "value" comes in to play here not only for the advantages presented by having a "value menu" in tough economic times, but also because, relative to its peers, its stock continues to trade significantly undervalued levels.

But that won't last for long. The company will be reporting its second-quarter earnings Monday before the market opens, and earnings per share expectations are $1.38 on approximately $6.95 billion in revenue. As much as I love the stock and the company's management, I would be lying if I said I'm not a little concerned after the Chipotle report, particularly because neither its April nor May comps were very robust, especially the latter due to weaker sales abroad in areas like Germany and Japan.

With the stock down ahead of the report due to Chipotle's poor guidance, I would add shares on the possibility of an upside surprise. The reason is simple: Over the past decade, McDonald's has increased annual sales by at least 6%, while more than doubling its operating margins.

Even more remarkable is that the company boasts an almost 30% operating margin over the past five years, while its closest competitor comes in at just 14%. This is not likely to change on this report, and I expect the stock to continue its upward trend and top $100 before the end of the year.

Buy Halliburton

It remains a shock that Halliburton is never mentioned when investors discuss prominent energy companies on the stock market. They always talk about its rivals, Exxon Mobile ( XOM) and Schlumberger ( SLB). But compared to Schlumberger, Halliburton continues to trade at a significant discount with a price-to-earnings ratio that is 8 points less.

Meanwhile, Halliburton has demonstrated on a consistent basis not only that it can beat analysts' expectations, but that it also understands the importance of delivering on the bottom line. With that in mind, the company is scheduled to report its second-quarter earnings Monday before the market opens, and Wall Street is expecting earnings per share of 75 cents on revenue of $6.96 billion.

I would be buying ahead of earnings. I don't expect any downside surprises as the company has either met or beaten analysts' estimates in each of the previous four quarters, including a 4-cent beat in the first quarter.

With the stock trading at $30 and its price-to-earnings ratio low at 9, it really becomes a challenge to not see a tremendous value, particularly given the fact that the stock is down almost 50% since its 52-week high last summer. Value investors should certainly make a play at current levels. Fair market value for the stock appears to be at least 33% higher, in the mid-$40s.

Buy Texas Instruments

On Monday after the bell, Texas Instruments will report its second-quarter results. What the company needs to do is demonstrate to Wall Street that it can indeed execute in a highly competitive chip market, while rivals Qualcomm ( QCOM) and ARM Holdings ( ARMH) continue to get the lion's share of the press.

Analysts are expecting earnings per share of 41 cents on revenue of $3.35 billion. In its Q1 report, TI said it expected Q2 earnings excluding items in the range of 36 cents to 44 cents a share and revenue between $3.22 billion and $3.48 billion. During the Q1 call, CEO Rich Templeton said that TI's "business cycle bottomed in the first quarter."

It's always a good sign when weakness is said to have bottomed - particularly said by a CEO. So does that mean investors should expect an upside surprise? I think so.

Also, it would be wise for investors to start appreciating that the company is doing a better-than-adequate job of not just maintaining margins, but working hard to grow them by establishing state-of-the-art, lower-cost manufacturing that could help support expectations of growing EPS well into the future.

With the stock trading at $27.25 and considerably below its fair market value, I would be adding shares here ahead of the report. From an investment standpoint, I see 30% more upside in the stock by the end of the year. When comparing its recent earnings and free cash-flow valuations, I remain convinced that the stock is trading at a considerable discount to future earnings potential, even as it offers a respectable dividend yield.

Sell Netflix

This continues to be one of the toughest recommendations for me to make because I am absolutely hooked on the service. Unfortunately, I just don't see a long-term sustainable business -- not with Apple ( AAPL) and Google ( GOOG) lurking around with TV plans of their own. It also does not help that Amazon's ( AMZN) Prime streaming service continues to gain traction. And can it survive the cable companies' entry into the streaming space?

The question continues to be how much time does Netflix realistically have left?

Netflix will be reporting earnings on Tuesday after market close and analysts are expecting 5 cents in earnings per share on revenue of $889 million. What I will be looking for is the subscriber numbers. While the company reported decent subs in Q1, it guided for 23.9 million in Q2, below analysts' estimates of 24.6 million.

Noteworthy in the Q1 call were comments suggesting that the company has shifted its focus off growing the subscriber number and toward growing the bottom line. While I think this is an excellent strategy, any sudden drop in subscriber growth could send the stock spiraling downward.

Although the company warned that the subscriber total would drop in Q2, the initial reaction to a lack of growth will still be shock. The reaction will not be favorable within an already finicky investor base. In other words, despite its warning, there is cause for optimism that it now plans to focus on what really matters: earnings per share.

With the stock trading at $81 and an expensive price to earnings ratio of 27, opportunistic investors should consider selling ahead of the report and look for the possibility of buying back in at least 10% to 12% lower, or in the $71 to $75 range.

Bottom Line

Earnings season can be both an exciting time as well as a time that brings a lot of anxiety for companies as well as investors. It's called the reporting period for more than one reason; companies are essentially sharing their quarterly report cards, and getting a passing or failing grade often depends on the expectations that were set.

At the time of publication, the author was long AAPL and MCD.

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

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