Throw Caution to the Wind and Buy This Stock in Front of Earnings
Equity investing is essentially about assessing opportunities and risks. No investment ever looks perfect; there are always reasons not to buy a particular stock. In fact, if there weren’t it wouldn’t be possible to buy anyway, as nobody would be selling. Awareness of those risks is important, but occasionally there is one factor that outweighs them and makes a particular stock stand out.
Buying anything in the week before the company releases quarterly results is, by definition risky. Even a good earnings report can cause a stock to collapse if expectations aren’t met or if unexpected pessimism is expressed in forward guidance. Buying stock in a company that is in an industry that you know has had a difficult quarter in front of earnings adds another dimension, and would generally be something for investors to avoid.
Mellanox Tech (MLNX) is listed as a manufacturer of semi-conductors, an industry that most analysts expect to have had a disappointing first quarter. MLNX will release earnings next week. Despite that, though, it may well be worth taking the risk and buying in front of that release.
MLNX was first highlighted in Market Musings back on June 3rd 2014, when the stock was trading at around $30. A 50 percent jump in under a year is a decent result, but the way things have gone it is looking like just the start. At that time I pointed out that Mellanox was focused on speed and that the demand was catching up with their products. That is still the case, but it is their dominance in one particular area that makes the compelling case for the stock, even at these elevated levels.
In the highly competitive tech world market dominance in any one field is rare, so when Mellanox management claim to have a roughly 90 percent market share in the Ethernet space it is worth noting. Now that that dominance has been achieved, sales of associated products, the switches and cables that connect the Ethernet cards will surely follow. That is why estimates for Q1 earnings from Mellanox have been gradually increasing over the last couple of months; a remarkable feat in a quarter where downward revisions have been the norm, especially in the semi-conductor industry.
If recent history is to be believed, though, even those upwardly revised estimates are likely to be short of the mark. The turnaround in MLNX’s fortunes over the last year or so has been spectacular and Wall Street has struggled to keep up. The company has reported positive surprises in each of the last four quarters, beating consensus estimates by a staggering average of over 600 percent in that time, as this report from Zachs pointed out.
Obviously that kind of number can’t be repeated, but at a time when the industry in general is looking at downward revisions, any beat or optimistic statements regarding the next quarter will cause a spike in the stock. That looks more likely now that Intec (INTC) delivered decent results, and if the stock jumps above the $48.92 level that represents a 20 month high it would clear a path to challenge $55.
Usually, for long term positions, investors are better off waiting for a company to report earnings before committing to the stock; there are just too many ways to get hurt if you don’t. In this case, though, the arguments look compelling enough to make throwing caution to the wind and jumping in early seem like a smart thing to do.