Earnings are a great time to capitalize on value, but it is also a time when value investors fall into traps. The key to successfully purchasing a stock after earnings is to assess the company’s value, and in this piece I am looking at three stocks that I believe are not worth the buy after reporting earnings.
Too Many Questions to Buy this Stock
In the past, International Business Machines Corp. (NYSE:IBM) was a zero-growth company that simply kept trading higher, but now the company is seeing slowed growth and is doing its best to convince Wall Street that it is not macro related. Personally, I think there is a demand issue on hand, yet regardless, I am more concerned with the company’s poor bottom-line performance. This is a company that had a much lower tax rate in Q1, as BMO suggests EPS could’ve missed by $0.34 (instead of $0.05) if not for the lower tax rate. In my opinion, this suggests more trouble on hand, and at the very least, too many questions for an investment.
Not a Bad Quarter, but there is Better Value Elsewhere
Shares of McDonald’s Corporation (NYSE:MCD) Corporation traded lower by 1.95% on Friday after the company announced earnings that met expectations. Therefore, considering the decent quarter, some might say to buy on the weakness. However, there are several parts to this story that I don’t like.
First off, this is a near zero-growth company, as revenues rose 1% total over the previous year. However, this growth was due to some emerging market growth and new stores, as margins actually declined and comparable store sales fell more than 1% in both Europe and the U.S. This fact combined with the stock trading near 52-week highs and with a P/E ratio of 18.65 (higher than the market), I think McDonald’s Corporation (NYSE:MCD) could be a trap and that there is better value elsewhere in the market.
Stock Trades Higher Despite Product Sales Slowdown
The final post-earning stock to sell from Friday is one that actually traded higher, Align Technology, Inc. (NASDAQ:ALGN). The maker of Invisalign traded higher by 4.55%. At the surface there is absolutely nothing wrong with the company’s earnings. Align Technology, Inc. (NASDAQ:ALGN) beat on both the top and bottom line, although by a slim margin, with revenue growth of 13.70%. However, sales of its Invisalign product have slowed, as demand is not materializing to expectations.
It is possible that the stock’s gains indicate that the market expects this slowdown to be short-term. If that’s the case, then I find it hard to explain that the company issued guidance below expectations. The stock is now trading at 21.50 times next year’s earnings with a price/sales ratio of 4.23, which isn’t cheap. Therefore, I’d sit this one out!
Conclusion
“I have returned my largest gains when buying after earnings. It is the time when investors are most illogical, and by learning how to identify this illogical behavior, you can profit from it.” Taking Charge With Value Investing (McGraw-Hill, 2013)
I have created significant gains from buying after earnings, even my Motley Fool CAPS picks are almost solely after earnings. This period of time is when deep value is presented, however it is also a period of great volatility and value traps. These three stocks highlighted I believe are presenting a trap, although none appear to have excessive downside. With that said, each company has questions, and due to these questions, I would seek value and better opportunity elsewhere.
The article Three Stocks “Not-to-Buy” After Friday’s Earnings originally appeared on Fool.com is written by Brian Nichols.
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