Earnings Season Volatility Has Investors Scrambling for Short-Term Trades

I like to call them the disaster du jour. It's when a particular stock gets crushed after missing analyst expectations or gets slammed for perhaps sounding more cautious than optimistic in giving its purview of the future. As jarring as these double-digit dips are for existing shareholders, they can also be pure gold for investors who are quick enough to react when they think the punishment does not fit the crime.

"Whether they miss here or miss there, that's not going to change the arithmetic of how they create value for investors over the long term," says Martin Leclerc, managing partner at Barrack Yard Advisors of IBM's (IBM) recent 10% post-earnings dive.

In the attached video, Leclerc explains that while he hasn't bought IBM yet, "it's very much on our minds," pointing out that the company's strong cash flow and a share count that's fallen 40% in a decade are the real "driving force."

Clearly, investors bring different objectives and expectations to the table when they buy a particular stock, and Leclerc is the first to point out that every beaten-down blue chip does not a buying opportunity make. In fact, he says he's just as likely to use earnings season volatility to the upside as an exit strategy, and cites Pepsi (PEP) as a good example of an "over-loved" stock.

"A year ago when it was 25 points lower and the dividend yield was almost 4%, and the free cash flow yield was around 8%," he explains, "we figured it's a stable demand stock, they have this great global franchise, and if you can buy it at around 15-times earnings, which was the case, then it made sense."

Today, with shares of Pepsi up more than 20% year to date, the dividend yield is now down to 2.6% and the trailing P/E ratio is north of 20, which makes Leclerc claim, "it's way too expensive."

Two other blue chip names that have experienced volatile earnings season reactions are Procter & Gamble (PG) and Johnson & Johnson (JNJ), both of which Leclerc owns but now has different short-term objectives.

Of P&G's 6% slide from an all-time high, Leclerc says, "it's not slammed enough for us to want to buy it again but it's certainly intriguing if it were to decline further."

While he says their $90 price target on J&J has almost been attained, he says with "the price creeping up and J&J becoming a darling of Wall Street again, we're thinking maybe it's getting a little pricey here."