Stone-Cold Earnings Trade Lock of the Week

Organic fruit

Organic fruitBring on the selling!

The market took a plunge on Friday thanks to a weaker-than-expected jobs report. The news included negative adjustments to prior month job numbers that reinforces the notion that the domestic economy hangs on the precipice of a double-dip recession.

The losses have the major indexes in or near correction territory of being down 10% from most recent highs. We now stand at levels last seen at the start of the year. In other words we are spinning our wheels.

How terribly frustrating the current market environment must be for investors. Corporate profits are moving solidly higher and yet stock prices stagnate.

Fortunately there is an alternative that I like to call Stone-Cold Earnings Trading. Screw buy-and-hold investing. I want to attack the market by targeting companies set to release quarterly operating results. Some might call this gambling, but I prefer to call it taking calculated risk and the more risk the better.

It is a subtle difference. For example those, including me, who enjoy the game of poker consider the activity to be a game of skill. Yes, there can be misfortune, but if done played properly utilizing mathematics and analysis, one can win more often than not.

The same is true with trading earnings. Those who fail to understand that one can make educated conclusions will scoff at the notion that one can predict the outcome of earnings reports in advance, but I see it differently.

In this column you will note the plethora of winners. They far outweigh the losers, including last week’s trading lock of the week, Joy Global. We were whipsawed with a turbulent market and the outcome was different than expected, but more opportunities to uncover winners like last week’s selection of CIENA abound.

Looking forward I am absolutely giddy about stock prices declining. As we approach the end of the quarter the set up for the next earnings season beginning in early July is looking rather stupendous. Expect stronger than anticipated results to be the floor for the correction and a strong boost for future gains.

This week’s Stone-Cold Earnings Trade Lock of the Week is a company that operates in a sector that is red-hot. The problem of course is that the economy is anything but red-hot. Specifically the attraction of shoppers to anything organic has stocks in that sector soaring. Valuations are high and poised for a fall.

This particular company is certainly growing profits nicely, but not at a pace to justify the current price. As for operating results, earnings have simply met or very slightly exceeded estimates. Typically momentum stocks like this one blow away the numbers.

My expectation is for this high-flyer to come back to earth after another merely average report. Buying a put on this baby before the news has the potential to be a double or triple in less than a few hours of trading. Check this one out and four other stocks that could be huge movers here:

James (Jamie) Dlugosch is a contributing editor to MSN Money, The, and Traders Reserve. He has a long and distinguished career in the investment industry that includes editorial and publishing stints with the highly rated Rational Investor, The Prudent Speculator and the current Penny Stock Winners. Jamie was a contributing editor to InvestorPlace Media where his content was syndicated to numerous on-line financial sites including MSN Money and AOL Finance. At the turn of the Millennium he was the President and CEO of Al Frank Asset Management where he honed his skills under the tutelage of the well respected guru, Al Frank. With The Rational Investor Jamie adapted Al Frank’s long-term market beating strategy to reduce risk and increase ease of use for subscribers. He was quickly rewarded for his efforts by compiling the second highest total return of all investment newsletters in 2004 according to The Hulbert Financial Digest. His investment approach has produced winning returns in competitions held by MSN Money in their long running Strategy Lab. He also has successfully raised private capital for a variety of private ventures including the purchase of Al Frank Asset Management, an investment now worth many times its original cost. Jamie is frequent guest and contributor to a wide range of financial television, radio and internet broadcasts including CNBC, Market Watch and MSNMoney. Jamie holds a B.A. in Political Science from UCLA and a Masters in Business Administration (MBA) from the University of North Carolina, Chapel Hill. He resides in Minneapolis, MN with his wife Sarah and two daughters, Julia and Ellie.

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