Earnings season is upon us once again. Although the traditional start comes this afternoon when Alcoa (AA) reports, we already saw some trading madness this morning. The Container Store Group (TCS) has dropped sharply after missing estimates and SodaStream (SODA) is plunging as a result of lowered expectations. Traders everywhere are firing up their search engines and poring over charts looking for earnings season trades. Everyone is looking to make some cash by making a better guess about the accuracy of analyst earnings estimates for the third quarter. Sadly, far more money will be lost than made by retail "traders" as the larger players in the stock and option markets move to specifically exploit the silliness in earnings season trades.
I confess that I have an earning season preparation strategy as well. I have a list of stocks that I really like, but are not yet cheap enough to buy. It's on my desk and I'm going to patiently watch it in hopes that one or more of the names will miss expectations and predictions badly enough to tumble down into my buy range. I am not going to try to predict what will happen or make bets on how the earnings are reported. Rather, I am putting myself in a position to react to what actually occurs and hopefully scoop up some new safe and cheap stocks for my portfolio.
Layne Christensen (LAYN) is on my "please drop" list and has been trying to accommodate me and fall to bargain levels. The stock is down 50% so far this year and is tantalizingly close to being too cheap not to own. The shares are currently trading at 90% of book value. I am hoping the company misses analysts' estimates for the fifth straight quarter and drops to 80% or less of book value. Layne Christensen provides construction and drilling services for the mineral, water and energy industries, a business that I believe has a very bright long-term future. This is a classic infrastructure stock and I would love to have it in my portfolio at the right price. The company reports late in the cycle so I will have to be patient. If the stock goes below $8, I will be an enthusiastic buyer.
Meanwhile, I will likely need a really bad earnings report from EZCORP (EZPW) for the stock to tumble to about $8 a share, but it seems inclined to head that way. The pawnbroker has missed estimates the past two quarters and I am hopeful it will do so again. The company has had a shakeup at the management and board level that should help improve performance going forward, but I would love to see another stumble before the business gets back on track. I am rooting for bad numbers that push the stock into deep value territory when EZCORP reports earnings the first week of November.
Gulf Island Fabrication (GIFI) is trading at 88% of book value and is just one little tumble away from being too cheap not to own. Given conditions in the oil services and drilling sectors, I think this may well happen sooner rather than later. The company builds offshore drilling and production platforms for oil and gas companies, and to be blunt, business is horrible right now. GIFI fits my definition of a perfect stock as Gulf Fabrication is a profitable company that pays a dividend and has a solid balance sheet. Now I just need the stock to fall to 80% or less of tangible book value, which is a perfect price in my corner of the world. Gulf Island also reports the first week of November.
Over the course of my career I have seen earnings season go from a quarterly checkup of a company's progress to full-blown trading-oriented madness. Unfortunately, this intense focus on short-term numbers has spread into management practices, which I think is bad for both corporations and financial markets. However, since I have to live in this world, rather the one I think it should be, I will have my list of "almost cheap" stocks at the ready to take advantage of any overreaction on earnings.