Fourth-quarter earnings season is in full effect, and with one busy week of earnings behind us and another one getting set to take hold, I thought it would be a good time to address the most common question I’ve been getting in recent days: How do you handle individual holdings around earnings?
It’s a simple question but a loaded question, so let’s start with a simple answer: Each stock must be looked at on a case-by-case basis. There are some cases where it makes sense to trim a position ahead of earnings; others where it makes sense to hold through earnings and still others where cutting ties completely with a stock is sound strategy.
On Jan. 16, I decided to trim my position in eBay (EBAY) ahead of its earnings report on Jan. 17. I sold at $52.40. With a cost basis of $51.35, I just didn’t have a big enough cushion in the stock to justify holding a full position. In hindsight, I should’ve held, but I managed risk and there’s nothing wrong with that. I still own some and will look to add to the position again at the appropriate time — either after it forms a new base or pulls back in low volume to support around $52. Shares closed Friday at $56.53.
When it comes to other holdings like Facebook (FB) and Rackspace Hosting (RAX), I have bigger cushions so I can afford to give them some room. Unless something drastically changes between now earnings, I plan on sitting tight in both positions. During market uptrends, remember the cardinal rule: Let your winners run.
Facebook reports on Wednesday after the close. Shares up are up nearly 11% since
I initiated a position on Jan. 4. I’m expecting solid results from Facebook. The consensus estimate calls for profit of $0.15 a share, up 7% from a year ago with sales up 35% to $1.52 billion. With the market acting as well as it is — and with earnings sentiment generally favorable — there’s no need to be too quick on the trigger. Shares closed Friday at $31.54.
I feel the same about Rackspace Hosting. I have a nice cushion here as well so I’m in no rush take partial or full profits ahead of earnings. Results aren’t due until Feb. 12. The consensus estimate calls for profit of $0.21 a share, up 17% from a year ago with sales up 26% to $355.4 billion.
I put out a buy on Rackspace for the Ultimate Growth Stocks model portfolio on Dec. 14 at $68.45. Shares closed Friday at $78.93.
Finally, there are some instances when I will exit a stock completely ahead of earnings — taking a small profit or keeping losses small.
Higher-volume declines in a stock are a sign of at least some institutional selling. If a stock I own shows signs of it ahead of earnings, I will generally sell first and ask questions letter. There have been times when this was the right move and other times when it wasn’t, but sell decisions are made based on information available at the time. I never look back and question them. Stocks acting poorly ahead of earnings should be kept on a tight leash. For a sample copy of my newsletter and to see what the rest of the model portfolio looks like, e-mail me here.
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