Buy Alcoa, Intel; Sell Infosys; Hold Johnson & Johnson

NEW YORK (TheStreet) -- Aside from M&A speculation, nothing gets investors more anxious on Wall Street than earnings season.

This is a time when investors receive confirmation or denial whether they have placed the right bets.

As we enter the second week of third-quarter earnings season, we are going to look at a few companies that are heading in three separate directions.

Reason to Buy Alcoa

The recent earnings of aluminum giant Alcoa ( AA) demonstrate not only how undervalued the stock is, but also just how overly cautious investors have been.

Alcoa reported a loss from continuing operations of $143 million, or 13 cents a share. This included a payout related to an environmental lawsuit totaling $175 million. Excluding one-time items, the company earned $32 million, or 3 cents a share.

For the quarter, Alcoa reported revenue of $5.8 billion, better than analysts' estimates of $5.54 billion. The prolonged weakness in the price of aluminum, which has declined by 5% from the previous quarter and by 17% annually, has hurt Alcoa's revenue growth.

However, Alcoa beat both top- and bottom-line estimates, showing that it continues to make the best of a bad situation despite significant market turmoil.

The company continues to turn in one solid performance after the other while reminding investors of just how committed it is about turning its fortunes around and returning value to shareholders. Though the market may wish to discount the shares, investors should take this as an opportunity to get in on a good company facing some headwinds at the moment but with a solid history of performance.

Reason to Buy Intel

Although I don't currently own the stock, I've become somewhat of an apologist for chip giant Intel ( INTC). Nonetheless, it's for good reason. I'll grant that Intel underestimated the transition to smartphones and tablets to the extent that Apple ( APPL) and Google ( GOOG) have contributed immensely to growth of several of Intel's rivals, namely ARM Holdings ( ARMH) and Qualcomm ( QCOM).

But that does not mean Intel is a lost cause.

The company has all of the makings of a successful turnaround story. The company earned $2.83 billion in its most recent quarter and beat analysts' estimates while meeting its revenue goals.

What's more, not only did Intel log sequential revenue growth arriving at 5% but remarkably, its PC revenue rose a respectable 4%. Although I will not suggest that the company is free and clear from any struggles, there are positives to consider.

Intel will be reporting its third-quarter earnings on Tuesday after the market closes, and analysts are expecting EPS of 50 cents on revenue of $13.2 billion. These would represent annual declines of 23% and 7%, respectively.

The stock is currently trading near its 52-week low of $21.48 -- almost 40% below some analysts' price targets, which have been as high as $29.71. As the stock continues to trade at what I believe to be a considerable discount with a price-to-earnings ratio of 9, there is the possibility that Intel can see the $25 level by year's end. If you are a value investor looking for a safe investment in technology and one that pays a respectable dividend, you should consider Intel.

Sell Infosys

Infosys ( INFY) disappointed investors last week by reporting results that fell short of analysts' expectations. The company reported earnings of 75 cents a share on revenue of $1.8 billion, missing estimates for EPS of 77 cents and revenue of $1.9 billion. Making matters worse was that the company cut its forecasts for net income through the first quarter of 2013 from $3.03 per share to $2.97 due to changes in currency values.

There continue to be growing concerns that the company is unable to execute effectively as it faces headwinds stemming from weak IT spending. Consequently, it is had no choice but to offer an outlook that is weaker than many analysts' predictions. That the quarter yielded the smallest number of new customers (39) in more than a year suggests that the company is having a difficult time growing revenues, a challenge that may last through the second quarter of 2013.

I would sell the stock at this point and look for a re-entry when it trades for less than $40. The company needs to demonstrate that it can put together two consecutive quarters of revenue and EPS growth before the stock can show any signs of life.

Hold Johnson & Johnson

Johnson & Johnson ( JNJ) continues to be misunderstood. Even so, its stock continues to perform adequately despite execution problems including product recalls. What has hurt JNJ of late is that it is perceived "too big to succeed."

Unlike several of its rivals, namely Pfizer ( PFE), Novartis ( NVS) and Covidien ( COV), which now appear more nimble and adaptable, JNJ comes across as incredibly stubborn in it unwillingness to adapt.

Its insistence on remaining one entity has hurt it. It would have seen positive results if it had opted to separate its businesses. JNJ has yet to prove that it can make a solid turnaround as long as it remains (in my opinion) too big and lacking in agility.

The company plans to report third-quarter earnings on Tuesday, and analysts are looking for net income of $1.21 per share, representing a decline of 2.4% from the same period one year ago. In its second quarter, however, profits fell almost 50% to $1.41 billion from the $2.78 billion that it reported a year ago. As a result, the Street has grown more pessimistic about the company's prospects, and I think investors should as well.

The fact that the stock is yet near its 52-week high is impressive and suggests that the company still has a good reputation in some quarters.

Nonetheless, analysts at Goldman Sachs have issued a sell rating on the stock even though they also set a price target of $72, which is higher than where the stock currently trades. I'm not bullish JNJ at this point, but its track record of solid performances suggests that it deserves time to be proven right. For now it's a hold.

Bottom Line

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

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

At the time of publication, Saintvilus held no positions in stocks mentioned.

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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