Earnings season kicked off last week and the results were mixed. Alcoa disappointed investors and quickly dropped 13 percent in the ensuing days. J.P. Morgan (NYSE:JPM) beat estimates, but continued to fall thanks to ongoing concerns about the banking industry as a whole (I know Andy Gordon is planning an article for tomorrow discussing the continuing problems in the banking industry, so you won’t want to miss that).  Intel reported Thursday night and they met lowered expectations.

But that is old news.  You are here because you want a forward outlook, not a rehashing of what happened last week.  But I bring up the major earnings from the past week to make a point.  The expectations for Alcoa (NYSE:AA) were still relatively high and they dropped sharply.  Expectations for J.P. Morgan were pretty low and they beat, but got taken down by the industry (guilt by association).  Intel warned, came in at expectations and jumped three percent the next morning.

The point is that earnings reports boil down to one thing: EXPECTATIONS.  Looking at the expectations for this season, due to the current economic crisis, overall expectations are much lower than in recent quarters.

This week we have a number of big tech stocks reporting and the expectations are definitely coming down.  Just to put it into perspective, I made the following table that shows the companies reporting and the current consensus estimate for earnings this quarter.  I have also included the estimates from 30 days ago as well as the estimates from 90 days ago.

As you can see, the expectations have declined sharply in the last 90 days.  Have they come down enough?  That remains to be seen and it will likely be case dependent.

If you look at the analysts rankings on these five stocks, the analysts love Google (NASDAQ:GOOG), Apple and IBM.  They hate AMD and EBay.

So the two of the five that stand the best chance of beating estimates are AMD and EBay.  This doesn’t mean you should rush out and buy them before earnings are announced, but should these two beat estimates, they have the best chance to move sharply higher.  Thanks to the negative sentiment toward them.

Earnings are a tough thing to play, but if you do your homework—looking at analysts’ rankings, short interest ratios, put/call ratios—you can tilt the odds in your favor.  I recommend to most people that they wait until after the earnings are announced, but if you insist on getting in ahead of the report, do it with options (lower cost of entry) and make small allocations to the trades.

I don’t make earnings plays in my K.I.S.S. Service, but I do occasionally have a trade on when earnings come out.  I almost always take profits off the table before the earnings report comes out and leave a little exposure so that if the stock goes my way, I can really juice my gains.  Meanwhile, if the stock goes against me, the pain is negligible because of taking profits off the table on a portion of the trade.

Good luck and good trading,

Rick

Source: Earnings Season Ramps Up This Week; Expectations Are Considerably Lower