January 7, 2013 - What Does the Winter Earnings Season Hold for Investors?
As we start the New Year, we have finally seen a deal reached in Washington on the fiscal cliff, and now it is time to shift our attention to the upcoming earnings season. The earnings season will officially kick off on January 8 when Alcoa (AA) reports its fourth quarter results, and while general expectations have been lowered over recent months, most analysts agree that results will generally be positive.
We have already seen a couple of big companies report earnings, with FedEx (FDX) being of particular interest. While a lot of people use Alcoa as a bellwether stock for the entire earnings season, there is a viable argument to be made that FedEx is a better stock to use.
With such a strong presence in both the U.S. and international markets, FedEx can serve as a good barometer to the health of the global economy. FedEx reported its fiscal second quarter results on December 19, slightly missing analyst estimates for earnings. Analysts had expected to see earnings of $1.41 per share, but actual results came in a little light at $1.39.
What is most troubling about FedEx's earnings report was statements from the company's CEO, Fred Smith, which indicated "persistent weakness" in the global economy. In addition to weakness in regions such as Europe, FedEx results were also hampered by Hurricane Sandy, which hit the east coast in December.
While the disappointing FedEx results do raise some concerns over the upcoming earnings season, the majority of stocks that have already reported have posted strong numbers. We have seen better-than-expected results from Oracle (ORCL) as well as Nike (NKE).
Based on what we have seen so far, I believe we are going to see a positive earnings season for most companies, but expect to see a few surprises along the way, especially for companies that have high exposure to the European market.
One stock that I like is the biotech company Celgene Corporation (CELG). The company has a strong pipeline of new products, and the products that they currently have on the market have shown solid growth. Regardless of the economic landscape, healthcare spending remains fairly consistent, and as a result I believe we will see strong earnings when the company reports fourth quarter results at the end of the month.
CELG is up 7.2% since the end of September. A nice hedged trade on CELG would be the April 67.50/65 bull put credit spread. In this trade, you would sell the April 67.50 put while buying the same number of April 65 puts for a credit of 35 cents. This trade has a target return of 16%, which is 57% on an annualized basis (for comparison purposes only). With CELG currently trading at $82.07, this trade has 17.8% downside protection.
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