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Earnings!

For this week, I focused on stocks that should move volatile after earnings and earnings announcements that are of interest. Cross currents still move within the market tide as the FOMC rate decision on Wednesday could keep speculation and pre earnings moves down to a minimum until after the event. Risk aversion seems to be the theme going into the FOMC and earnings. You don’t want to be caught on the wrong side when Mr. Market decides to move on either. Earnings have been very volatile so far. Diagonal spreads and straddles with short strangles with options have proved to be the best option strategy so far when directly playing these catalysts because option premiums are so high due to volatility and high time value. Trading after earnings has also proved profitable as volatility and volume has been present on most earnings catalysts after the fact although because of volatility, timing has been difficult. Speculating on price direction before the earnings announcement has been extremely difficult with the negative market sentiment and not very favorable risk/reward scenarios with high option premiums. In some cases trading the stock had better risk/reward opportunities versus trading the “expensive” options. As a matter of fact our options site will now include stock trade prices as well as option trade prices in order to give all traders a choice of vehicles!

Right now, good earnings and guidance that coincide with a market uptrend seem to get rewarded. Any missteps on earnings or guidance and your stock price gets taken to the woodshed. Company executives are preplexed when they surpass expectations on all metrics and their shares still get punished. What are they to do? I would say its not your fault, it is just the market dynamics right now and the economic market cycle playing out with a risk aversion kicker. Just keep on growing and focused on high performance and when things turn around you will be noticed and remembered. Also of key importance is the elimination of the short tick rule which has fundamentally altered the mechanics of market liquidity IMO (giving short sellers more leeway and strength) and thus changing the rules of the game. Expectations on the more popular names seem largely priced in to the stock as the bears sit and wait to fade the gap after earnings on no new surprises. On our website, I have written an article about gap trading that could help one decipher some patterns. In the chat room we will discuss trade ideas, option and trade strategies and of course Happy will now relay trades in stock prices as well as options for those who only like to trade stocks.

The GOOG Machine
Even though GOOG’s earnings is probably the most watched event this week, it will be overshadowed by the FOMC policy decision. After the initial knee jerk market reactions, people should start focusing on the earnings calender more. GOOG’s share price will be influenced by the Fed action, AMZN and YHOO earnings, and market sentiment throughout the week.
GOOG is expected to bring in $4.44 a share with a $4.78 high estimate. GOOG revenues are expected to come in at $3.44 billion with a $3.60 billion high estimate. In the current quarter, GOOG’s growth estimate YoY is just under 40% versus the 11% for the sector. Going into earnings, analysts are split over how GOOG performed last quarter. GOOG does not give guidance so analysts will extrapolate off of current earnings in order to change their estimates and models.

These are the recent thoughts from analysts:
On a Jan 25th note, Jefferies said they expect strong results to be driven by seasonally strong ad spending, continued gains in search market share, and monetization improvements. They estimate revenue of $3.44B and EPS of $4.48. They reiterate a Buy with a $725 target.
On a Jan 25th note, Oppenheimer said they expect upside in Q4 from International and Quality Scoring and finds the risk/reward very compelling at current levels. GOOG remains their #1 stock idea with an $850 target. They keep GOOG at Outperform and say concerns about Q4 are overblown.
On a Jan 24th note, Stanford downgraded GOOG shares citing slowing e-commerce and search volume growth, along with the global slowdown. Lowering their recommendation from buy to hold while not presenting any new earnings forecasts or numbers.
On a Jan 24th note, William Blair advises caution into GOOG’s results as their regression analysis suggests some risk to the quarter. GOOG remains one of their top long-term picks, they believe it is unlikely that Q4 results will exceed expectations as has been the norm in recent quarters.
On a Jan 23rd note, Bernstein said they expect very strong results. Bernstein believes the company will return to its normal operating margins of 33% and report EPS of $4.44, which is inline with expectations.
On a Jan 23rd note, UBS came out with a cautious comment on the quarter but also saw a long term opportunity in the shares on any further declines or at this current level. UBS sees little upside to their 14.7% QoQ revenue growth estimate but views the recent pullback along with long-term prospects as a positive.
On a Jan 22nd note, Cowen said paid search spending remained strong and continues to recommend GOOG, but sees the odds of an upside surprise as low given the current environment. Their checks did indicate that solid Q4 demand for online ads and e-commerce growth were there.
On a Jan 15th note, Soleil’s revised their current Q estimates to reflect their lower-than-projected growth in page views and viewer traffic in the month of December as well as higher expense growth. Soleil lowered their Q4 estimate from $4.72 to $4.40
per share and kept their hold rating.

Now let’s look at important recent business developments and key metrics:
On Jan 4th, a Google patent recently was made public describing a method for computers to read text in images and video. Sources suggest that video and images would be searchable by the text actually located within either the video or image. A positive development in search and for the company’s core strength.
On Jan 8th, Hitwise reported that GOOG got 65.98% of all U.S. Searches for December an increase from 65.1% in November.
On Jan 13th, ZDnet gave food for thought with an article saying that online advertising revenue to the big three, GOOG, YHOO and MSFT could be hurt by the CFC buyout by Bank of America. The consolidation will eliminate a big advertising spender to the Big Three and their lavish spending ways will now be cut back by its new parent. I always see CFC ads on CNBC and other channels of mass media so this will hurt the industry as a whole as it has been with so many mortgage companies going out of business.
On Jan 14th, the NY Times said GOOG has seen a surge in traffic from the iPhone. According to internal data provided to NYT from GOOG, traffic to Google from the devices surged and surpassed incoming traffic from any other type of mobile device on Christmas. I love my iPhone, and think it rates up there with one of the greatest technological devices or products ever made. This is very positive news fundamentally and now a very important pillar to GOOG’s wireless growth strategy.
On Jan 15th, Clearwire and GOOG announced a collaboration to deliver the company’s popular Google Apps to Clearwire customers. Clearwire will begin migrating its current customers to Gmail and Google Calendar in the first half of this year. In addition, Clearwire customers will also have access to Google Talk. This would be an incremental positive.
On Jan 17th, comScore said GOOG sites had 31.3% of video market share in November.
On Jan 18th, Breakingviews.com gave some activist shareholder ideas to Yahoo’s management about changing the company strategy and focus in order to cut costs and deliver unlocked value by outsourcing its search to GOOG. This I take with a grain of salt, but if it happened barring a MSFT buyout, this would be a big positive for GOOG and its traffic and revenues for sure.
On Jan 23rd, comScore noted that GOOG search share slightly dipped from 58.6% in November to 58.4% in December. GOOG’s Q4 US Paid Click growth was up 8% QoverQ versus Q3 of 11%, showing slower growth and is one reason for the recent cautious comments from analysts. This key metric could give insight into GOOG’s earnings announcement and justifiably warrant caution. This I don’t take a grain of salt with.

GOOG has shown its hand on a couple of growth initiatives which will be wildly popular IMO. On Jan 24th, GOOG announced that YouTube was set to expand mobile service to include videos and other features called “YouTube for Mobile”. GOOG also unveiled a Google Health login page with several new features that allow users to build online health profiles and download medical records from doctors and pharmacies. Additionally, users will be able to get personalized health guidance and share selected information with family. Big news for those who’ve had problems with health care services and those who want easy access to their personal information.