Playing earnings correctly can sometimes be the difference between a passing and a failing portfolio.
NEW YORK (TheStreet) -- Aside from merger and acquisition speculation, nothing gets investors more anxious on Wall Street than earnings season.
This is a time when judgment is passed on our investment decisions. So as we enter the second week of these "midterm exams," we are going to looks at four companies that are essentially heading in three separate directions.
The first two are IBM(:IBM) and Qualcomm(:QCOM), which I think investors would be wise to add ahead of earnings.
There is also an excellent trade opportunity that might emerge in Bank of America(:BAC). And finally, we will look at why it might be time to lighten up on Johnson & Johnson(:JNJ). Although it remains a strong long-term play, I think the stock may have reached its high mark of the year. Buy IBM
With Big Blue's stock trading at less than $200, Wall Street appears to be getting this story completely wrong.
First, despite ongoing concerns regarding corporate IT spending, the company's focus on business analytics and cloud services give it a vital role in the enterprise sector. This is in addition to its strong growth areas and forward-looking initiatives like its "smarter planet."
Secondly, the company deserves a considerable amount of credit for having successfully navigated through this new consumer-centric market. Only a short couple of years ago, IBM was teetering on the brink of irrelevance, while the market was being led by more nimble and agile players such as Apple(:AAPL) and Google(:GOOG).
The company is due to report its second-quarter earnings results on Wednesday after market close and I expect its recent trend of earnings beats to continue. Investors would be wise to accumulate shares prior to the announcement. For the quarter, investor should expect EPS to arrive at $3.43 on revenue of $26.36 billion, topping last year's quarter of EPS of $3.09.
It's hard to imagine that at one point the company languished under a stifling corporate culture, one created by the declining rule of the enterprise. However, today, IBM is once again a beacon of power and has led a type of resurgence that two quarters ago seemed unimaginable. Today, in addition to a strong product pipeline that is second to none, its aggressive expansion into emerging markets, as well as its recent acquisitions continues to make it one of the best long-term plays on the market. The stock is a buy. Buy Qualcomm
As much as I continue to appreciate the value that Intel(:INTC) presents, each quarter that goes by I have become more and more enamored of Qualcomm(:QCOM). It continues to affirm exactly why I think it has one of the best businesses not only among the semiconductors, but in the entire market. Even better, it operates in fast-growing industry helped by the growing popularity of mobile devices.
Not only is Qualcomm an industry leader, but when you consider that its brand now controls the internal component space of approximately 250 million smartphones and other devices, it becomes clear just how underappreciated the stock has become. The stock is down 20% after hitting its 52-week high of $68.87 due to some concerns with its supply chain.
However, "the problem" was that the company had too much demand and not enough products. Consider if that were the other way around. For this reason, I think the retracing in the stock has been an overreaction.
The company is due to report earnings on Wednesday after market close, and analysts are expecting earnings per share to arrive at 86 cents on revenue of $4.68 billion, representing a 13 cent increase from the same quarter a year ago.
Though investors still have some concerns, it is clear that since its last report the company's management understands its supply chain challenges. From an investment perspective, I see a tremendous buying opportunity at current levels and value investors that jump in on weakness will have a $72 stock by the end of the year. Trade Bank of America
Bank of America, which is not only one of the most volatile stocks on the market but one of the most heavily traded with volumes exceeding 180 million shares on any given day, will report its second-quarter earnings on Wednesday before market opens. Though there have been some proclamations that the bank is back, I think the broader market will take the typically "yeah, but..." reaction.
In other words, one quarter will not change three years worth of disappointment. However, its first-quarter did serve to open some eyes on the positive side, coming at a time when the market was questioning its ability to survive.
Analysts are expecting earnings per share to arrive at 15 cents on revenue of $22.82 billion. A year ago, the bank reported a loss of 90 cents a share.
As the stock is now trading at $7.82, down 23% from its year-to-date high of $10.10, I think there is an excellent trading opportunity here. As noted, it is one of the most volatile stocks on the market, and any positive report can send shares soaring as much as 10%, reaching $8.50 during premarket.
What investors have to keep in mind is that the stock has a median target of $9.25 and is a recommended hold. In other words, not a lot of movement is expected beyond this range.
So making money on this stock may involve playing the temporary swings. But the timing has to be precise.
Typically, there is no better time than right before an earnings report, particularly on a stock that has been on a downtrend and can use earnings to jolt its pulse.
Another area investors should focus on is the company's cost-cutting initiative, which started in the fourth-quarter. According to an article in The Wall Street Journal, BofA has started shedding its headcount by 30,000.
The bank has been working hard to make its operations cleaner and more efficient following years of mergers under the previous management. To the extent that it can demonstrate a significant reduction in expenses, shares could soar. This might also serve to lower the market's pessimism regarding its balance sheet and ability to execute effectively.
From an investment standpoint, with the stock having traded as high at $10 on a couple of occasions this year, its current price represents a good entry opportunity. Valuation metrics suggest that it can realistically hit the $12 mark at some point this year. However, if you are looking for a quick 10% to 15% this week, it may be wise to add now and exit after earnings. Sell Johnson & Johnson
If there is one company that I have had a hard time trying to understand this year it is Johnson & Johnson. For as tough of a time as it has had with execution, it seems that the market simply does not care. The fact that the stock is yet at its 52-week high tells me that its reputation for being a great company has trumped these minor headwinds.
But what happens when it stops? This is the question holders of JNJ should be asking themselves and one where it may be wise to consider trimming a little off the top.
The company has made recent mistakes, including product recalls, and until recently its stock performance has been broadly uninspiring. Johnson & Johnson's first quarter was not so healthy, even though its numbers beat analysts' estimates.
Revenue arrived at $16.1 billion, down slightly from the same quarter a year before. Earnings were $3.8 billion, or $1.37 a share, up 1.5% from a year before. But the headline numbers obscured some disappointing details, including a 5.1% decline in revenue from the U.S.
Furthermore, in terms of valuation, there are better options available in rivals like Pfizer(:PFE), Covidien(:COV) and Novartis(:NVS).
All three are trading at much lower price-to-earnings ratios than JNJ while offering similar to (and in some cases) better gross margins and operating margins.
The company's stumbles over the past five years lend support to the notion of breaking it into smaller parts. But the company has resisted.
This insistence to remain one entity is remarkable when rivals such as Abbott Labs(:ABT) as well as the aforementioned Pfizer have enjoyed positive results from opting to separate their businesses.
Although I'd like to give Johnson & Johnson the benefit of the doubt on this issue, the company 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.
Furthermore, its lack of growth doesn't support its having such a higher P/E. For this reason, I would consider selling the stock ahead of its earnings report, due out Tuesday before market opens. Coming Up
In the next article, we're going to look at possible earnings plays in Google(:GOOG), Microsoft(:MSFT) and Chipotle Mexican Grill(:CMG).
At the time of publication, the author was long AAPL and held no position in any of the stocks mentioned.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.