Market Overview

Navigating Volatility During Earnings Season

Navigating Volatility During Earnings Season

Fourth-quarter earnings season is in full effect. A very busy week of earnings last week is in the rear-view mirror and another one is set to take hold. Now is a good time to address a frequently-asked question: Growth stocks can be volatile around earnings time. What's the best way to handle them?

It's a simple question but a loaded question, so let's start with a simple answer: Each stock must be looked at on a case-by-case basis. There are some cases where it makes sense to trim a position ahead of earnings; others where it makes sense to hold through earnings and still others where cutting ties completely with a stock is sound strategy.

On Jan. 16, we decided to trim a position in eBay (Nasdaq: EBAY) ahead of its earnings report on Jan. 17 -- selling at $52.40. With a cost basis of $51.35, we just didn't have a big enough cushion in the stock to justify holding a full position. In hindsight, we should've held, but we managed risk and there's nothing wrong with that.

We still own some and will look to add to the position again at the appropriate time -- either after it forms a new base or pulls back in low volume to support around $52. Shares closed Friday at $56.53.

When it comes to other holdings like Facebook (NYSE: FB) and Rackspace Hosting (NYSE: RAX), we have bigger cushions so we can afford to give them some room. Unless something drastically changes between now earnings, we plan on sitting tight in both positions. During market uptrends, remember the cardinal rule: Let your winners run.

Facebook reports on Wednesday after the close. Shares up are up nearly 11 percent since we initiated a position on January 4. We're expecting solid results from Facebook. The consensus estimate calls for profit of $0.15 a share, up seven percent from a year ago with sales up 35 percent to $1.52 billion.

With the market acting as well as it is -- and with earnings sentiment generally favorable -- there's no need to be too quick on the trigger. Shares closed Friday at $31.54.

We feel the same about Rackspace Hosting. A nice cushion means we're in no rush take partial or full profits ahead of earnings. Results aren't due until Feb. 12. The consensus estimate calls for profit of $0.21 a share, up 17 percent from a year ago with sales up 26 percent to $355.4 billion.

We put out buy on Rackspace for the Ultimate Growth Stocks model portfolio on December 14 at $68.45. Shares closed Friday at $78.93.

Finally, there are some instances where we will exit a stock completely ahead of earnings -- taking a small profit or keeping losses small.

Higher-volume declines in a stock are a sign of at least some institutional selling. If a stock we own shows signs of it ahead of earnings, we will generally sell first and ask questions letter.

There have been times when this was the right move and other times when it wasn't, but sell decisions are made based on information available at the time. I never look back and question them. Stocks acting poorly ahead of earnings should be kept on a tight leash.

This Week's Earnings Calendar

Monday: Seagate Technologies (NYSE: STX), VMware (NYSE: VMW), Yahoo (Nasdaq: YHOO)

Tuesday: Ford (NYSE: F), Harley-Davidson (NYSE: HOG), JetBlue Airways (Nasdaq: JBLU), Polaris Industries (NYSE: PII), (Nasdaq: AMZN), Ryland Group (NYSE: RYL)

Wednesday: Commvault Systems (Nasdaq: CVLT), Phillips 66 (NYSE: PSX), ConocoPhillips (NYSE: COP), Facebook (NYSE: FB), Qualcomm (Nasdaq: QCOM), Tractor Supply (Nasdaq: TSCO)

Thursday: BE Aerospace (Nasdaq: BEAV), Cameron Int'l (NYSE: CAM), Mastercard (NYSE: MA), Meritage Homes (NYSE: MTH), MDC Holdings (NYSE: MDC), Sherwin-Williams (NYSE: SHW)

Friday: Chevron (NYSE: CVX), Exxon-Mobil (NYSE: XOM), Perrigo (Nasdaq: PRGO), Ingersoll-Rand (Nasdaq: IR)

Posted-In: Earnings Long Ideas News Movers Tech Trading Ideas Best of Benzinga


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