Sell Sirius XM Ahead of Earnings, Buy Chesapeake Energy

NEW YORK (TheStreet) -- As we now enter the sixth week of second-quarter earnings reports, I think it is fair to say that investors have been learning the most important lesson of all when it comes to these reports: "expect the unexpected." Or when that has not worked, they are learning to "expect nothing, while hoping for the best."

In my mind, these are the only ways to avoid the rash of disappointments that have marred portfolios, some more than others.

There was the surprise by Yahoo! ( YHOO), followed by the Chipotle ( CMG) disaster. And sandwiched in between that was Microsoft's ( MSFT) first ever quarterly loss and a "ho-hum" quarter from IBM ( IBM). Oh, and let's not forget that Apple's ( AAPL) report missed expectations, though it reported 20% increases in both revenue and profits.

So essentially, reporting period is akin to the box of chocolate: "You never know what you're going to get."

Nevertheless, in this article, we will look at two companies that are due to report earnings this week and try to predict which direction they are likely to go due to their reports. The first company is Sirius XM ( SIRI), which we are looking to sell, and Chesapeake Energy ( CHK), which looks like a buy recommendation.

Sell Sirius XM

Sirius XM will report earnings on Tuesday, Aug. 7 before market open, and consensus estimates call for the company to report 2 cents in earnings per share. Outside of that, there is very little to look forward to. I say this because on July 9, the company, for the most part, announced its results, so there will be no surprise.

In its pre-announcement, Sirius said it grew subscribers to the tune of 622,042 in the second quarter -- this, despite having recently raised its base subscription rates. Its net adds for Q2 represents an annual growth rate of 38% from 2011. So if you are keeping score at home, Sirius has added 1 million net subscribers in the first half of the year, bringing its total to about 22.9 million as of June 30.

Which raises the question: Why did Sirus (only) predict 1.3 million additions for all of 2012? In fact, its weak guidance, combined with uncertainty about the implications of increasing its rates contributed to concerns about its growth prospects. Nonetheless, as result of its Q2 performance, the company has already raised its full-year subscriber guidance to 1.6 million and its revenue guidance to $3.4 billion.

Since the July 1, the stock has climbed as high as 20%, reaching $2.20 on two separate occasions. It is clear that the stock has already rallied on this news and that the only possible direction it can go upon the announcement is down, creating a "sell-the-news" type of a situation. With no clear catalyst remaining, I would not want to be a holder of Sirius, particularly while its status in relation to Liberty Media ( LMCA) remains so uncertain.

Buy Chesapeake

These days, it is often considered offensive to say anything positive about Chesapeake Energy ( CHK). The stock has suffered a considerable amount of punishment over the past several quarters due to some regrettable decisions by management and significant gaps without positive news.

Its self-inflicted wounds notwithstanding, there are also issues of concern for the entire energy industry that are hurting rivals such as Console Energy ( CNX), EOG Resources ( EOG) and Range Resources ( RRC). The majority of the concerns center on the health of the overall sector and, in particular, of natural gas, which has had some challenges this year due to reduced shale demand.

Chesapeake will report earnings for the second quarter on Tuesday before market open. Analysts are expecting EPS of 7 cents, down from the 12 cents they once expected. The company is expected to announce revenue of $2.37 billion, lower than the $3.32 billion that it reported in the same period of year ago.

For the fiscal year, analysts are now expecting EPS of 38 cents on revenue of $8.29 billion. I like Chesapeake at this level because not only has the stock been beaten up for most of the year, but not a whole lot is expected. Although it can still disappoint, I tend to think that there is a greater chance that the surprise will be on the upside.

The company has produced double-digit revenue growth over the past four consecutive quarters. What's more, its year-over-year growth has been by an average of more than 50%, including 65% in Q2 of fiscal 2011. Even more remarkable is that, in terms of profitability, Chesapeake offers both higher profits and operating margins than most of its peers with much higher multiples.

As it stands, the stock is down almost 50% from its 52-week high of $35.75. It is unlikely that its fundamentals have changed that drastically to justify this level of punishment. I would be adding shares at these levels in anticipation of a solid report.

At the time of publication, the author held no position in any of the stocks mentioned.

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

Richard Saintvilus is a private investor with an information technology and engineering background and has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.

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