Watch for Negative Earnings Surprises

 | Apr 26, 2013 | 11:00 AM EDT  | Comments
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Stock quotes in this article:

svu

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fcs

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nflx

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cva

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cbst

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irwd

On Monday we examined the major earnings surprises for this earnings season so far. We were looking for names that have undiscovered earnings momentum that could drive the price higher in the coming weeks and months.

Similarly, the negative surprises indicate hidden weakness in a business, and the stocks are to be avoided. (Ideally you anticipate the negative surprise and are "gone" before they report. But if you own one of these negative surprises, you need to work incredibly hard to justify why you are long.)

Here is a table of major earnings misses since earnings season started in April.

Like the upsides, I am not detecting any collapse on an industry basis; rather, the misses all seem to be company-specific.They cover the waterfront, from a retailer like SuperValu (SVU) to a semiconductor name like Fairchild (FCS). Some misses are likely to be ignored, such as Netflix (NFLX), which has cult-like status. Others like Covanta (CVA) are taking already lousy expectations and doing even worse. A name like that should go on your radar for the day when it is so washed out and hated, there is nowhere to go but up.There are a few pharma names in there. A profitable one like Cubist (CBST) missing and losing money can be a problem; others like Ironwood (IRWD) that are development stage and losing money anyway are less problematic.

If you own any of these names, break out the books and start figuring out the long-term story, because they are unlikely to work in the near-term.

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