RD's Picks

Last week, I wrote about a plan to trade the earnings releases of heavy industrial companies with worldwide markets based on the recent track record of similar companies.

I had identified five companies with earnings releases this past week that fit the profile of manufacturing heavy industrial equipment and selling around the world. Those candidates were Nacco Industries (NC), Manitowoc (MTW), Bucyrus (BUCY), Regal Beloit (RBC), and ASV, Inc. (ASVI). I ended up working with NC, BUCY and RBC. MTW started to run up in the after hours Fri, Oct 26 and didn't pull back before earnings. ASVI was trading near its 52-week low and I wasn't sure why, so I opted not to use it.

First up - Nacco. They make lift trucks and housewares and they mine and market coal. Interesting business mix. On Monday, they reported earnings of $2.55 a share vs. $2.27 last year and provided good guidance for 2008. There are no analyst estimates listed on Yahoo. I entered a limit order Mon morning, but only got 20 shares at $102 before it climbed above my limit. Sold on Tues at $107. Gain of about $100 on $2000 overnight. Good percentage, but couldn't get a big enough position to make much impact.

Next out of the gate - Regal Beloit. RBC makes electric motors, generators and gears. On Thursday morning they reported a good quarter, but lowered estimates for the next quarter. I bought this one in increments Mon - Wed in the low to mid 48's. Sold on Friday at 47.47 for a loss of $560. On a percentage basis, that was less of a loss than the S&P 500 for the week.

Finally, Bucyrus. BUCY makes mining machinery. They reported during the day Thursday. It was a good report, but kind of confusing because there were results from an acquisition mixed in along with some non-recurring expenses related to the acquisition. After the non-recurring expenses were backed out, they handily beat estimates and reported a solid backlog. I bought 1080 shares on Mon and Tues at 80.28 and 80.91 and sold 500 of them on Fri at 83.73. I opted to hang on to part of the position and see if the there's any follow through to the good earnings. That resulted in a combined realized and unrealized gain of $1300 or 1.5% over a week where the S&P lost around 2%.

The biggest problem I had was having enough cash to invest without cannibalizing the rest of my portfolio. That's particularly difficult when two of the trading candidates are releasing earnings close together. In the case of Nacco, I would have needed to start accumulating a few days earlier or taken more risk by buying with a higher limit price to build a decent position. With BUCY and RBC reporting close together, I had to build positions in parallel and decided to put more focus on BUCY since I thought it was the stronger candidate. As it turns out, a smaller position in RBC was a good thing.

In summary, nothing earth shattering. But the net result was a small profit over a week that saw the overall market take a hit. A little less than 1% for the week across the three trades doesn't sound very impressive, but it would be 46% annualized.

Based on this small experiment, the keys to success are identifying the characteristics of companies that are beating earnings and responding well to earnings releases, finding companies reporting in the near future that fit those characteristics, and having a buy-sell plan. The price moves both this week and from my research the week before were typically fairly small, so it's important to have disciplined buying approach and not chase a stock price that starts to run up. Low or free commissions would be critical to making this work in the real world.

This type trade is outside my risk tolerance with real money, but I've decided to give it a go again next week with Sun Hydraulics and Kubota. Sun reports early Monday morning and Kubota reports overnight on Monday. I bought some Sun and a little bit of Kubota today. I would have liked to get a bigger position in KUB, but it's pretty thinly traded and I would have had to chase it a bit. I'll put in a limit day order for Monday to see if I can build a little bigger stake before the earnings release.

Comments: View Comments |  Friday November 2, 2007