Friday, November 19, 2010

GES Watch

I'm at a decision point on whether to play Guess ? Inc. (GES) earnings, which will be announced after the close on Tuesday, Nov. 23.

(It was scheduled for Nov. 24, but they moved it up a day.)

In my analysis posted Nov. 16, I listed my misgivings about this play, despite excellent financials and an OK chart.

My main problem with GES is that upside earnings surprises the past two quarters have been followed by price declines.

Earnings week last August saw the price slide by 14.5% after earnings beat the Street by 3¢. The week after earnings in May produced the price drop of 10.2% after earnings beat the consensus by 5¢, and that was after a four-week decline that reduced the price by 25.4%.

Facing that, I've decided not to open a position on GES.

At this point, the rational response is to jump up shouting, "No! No! No! Past behavior is no guarantee of future results!! The past is not prologue!!!"

All of which is a fine statement of the theory of a rational marketplace, where a multitude of informed buyers and sellers determine the proper value of a company and its stock.

An alternative theory is that of a manipulated marketplace, and earnings are an arena where there is huge scope for manipulative practice.

A company makes decisions that, within limits, can determine earnings per share, depending upon the treatment of outflow and income on the books. It's all arcane accounting that is very much beyond my knowledge.

But the corporate decisions that determine earnings are not only possible, they're required, and they happen within every company every quarter.

So by that argument, repeated earnings surprises are a result of company policy. If a company shows upside surprises quarter after quarter, it means that someone in the executive suite thinks that's good for the company, and GES has produced a surprise every quarter for at least two years.

Contrast that with The Gap (GPS), which handled a potential earnings surprise by issuing guidance, 11 days before the announcement, that happy news lay ahead, negating the trading benefit of playing a potential earnings surprise.

So, if a company like GES has a pro-surprise policy, and if recent surprises are less than they have been historically, or/and if the marketplace reacts negatively to a positive surprise, that suggests the company tried to produce an earnings surprise but failed.

GES for two quarters has given birth to earnings surprises that were stillborn in the marketplace. They weren't viable surprises, as the price declines showed.

That's an unacceptable risk in my book, and so GES will announce its earnings next week without my having a stake in the outcome.

I shall keep GES on the Watchlist, however, so I can test whether my decision was correct.

Tim Bovee, Private Trader tracks the trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

  • h-a trend - Heikin-Ashi trend.
  • obv - On-Balance Volume.
  • pps - Person's Proprietary Signal.
  • psar - Parabolic Stop and Reverse
  • ma20 - 20-day moving average
  • ma50 - 50-day moving average
  • ma200 - 200-day moving average
  • macd - Moving Average Convergence-Divergence

About the glance: The colors indicate the state of each signal.
  • Signal Section:
    • pps, psar, macd: green for bull mode, red for bear.
  • Confirmation Section:
    • obv: green for uptrending, red for downtrending.
    • h-a trend: green for uptrending, red for downtrending.
  • Environment Section:
    • ma20, ma50, ma200: green for above the average, red for below the average.

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