Earnings Preview: Alcoa Inc. (NYSE:AA), Yum! Brands, Inc. (NYSE:YUM)

October 04, 2013, 03:43 am ET, BY Neal- Contributor| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

Earnings season is upon us again, and as the first companies start releasing their earnings, we are going to offer investors a brief pre-earnings analysis of current and past quarters.  Our focus will be on price, and how stocks might react after earnings reports. 

It is difficult to predict what a stock might do solely based on information released during earnings, so we will also dig a little deeper.  Sometimes stocks go lower after beating estimates, and the reverse is true as well, so it is also important to factor in what smart money has been doing lately, and we do that looking at price.

This combination of simple earnings data and price-based analysis can help investors not only understand earnings results, but also anticipate the stock’s move after earnings are released.

The following Companies report earnings on October 8 2013:

Alcoa Inc. (NYSE:AA) is expected to double its earnings from the same period last year when it reports on October 8.  However, the company is only expected to earn six cents per share, having earned only three cents per share last year.  Interestingly, Alcoa has beaten earnings estimates for each of the past six quarters, but the stock is languishing. Given the lackluster earnings growth this might not be a surprise, but is the recent weakness in the stock an opportunity to buy?

Price is the most important factor in determining where the stock goes from here, after earnings too, and shares of Alcoa are trading near a 52-week low.  Based on the Stock Traders Daily real-time trading report, the stock is moving closer to long-term support, but it is not there yet. If the stock continues to move lower and successfully tests long-term support we would be buyers near support. If support holds, we would then expect a complete oscillation back to resistance, but if it breaks the otherwise positive bias that would exist if support held would abate, and the buy signal would dissolve. 

Yum! Brands, Inc. (NYSE:YUM) is expected to earn $.93 per share in earnings this season when it reports on October 8, which is the most the company has earned since the third quarter of last year when it recorded $.99 per share.  However, even though earnings may not have appeared robust lately, Yum Brands has beaten estimates every quarter for the past four quarters in a row.  China sales were negatively impacted this year by intense media attention surrounding the poultry supply incident in China, but it could be a big positive for the stock if YUM can show progress on the Chinese turnaround.  Ahead of earnings, the stock has backed off a little from recent highs, and sits about where it was trading this time last year, so should investors be considering buying shares ahead of earnings?

According to the real-time trading report offered by Stock Traders Daily, Yum Brands is getting close to a test of support, and as a rule we are buyers if support is tested (it is not there yet).  From there, as long as the stock remains above support we would expect a full oscillation to resistance again, so if support is tested we would be buyers, expecting higher levels and a test of resistance.  However, support also acts as our risk control, and if support breaks lower, we would be selling that position.   

Although earnings season can bring with it a host of surprises, the simple approach may sometimes be the best choice, and our attempt here has been to provide a straightforward data-driven look-ahead analysis to prepare investors for the earnings report that lies ahead.  Good trading!

Support and Resistance Plot Chart for

Real Time Updates for Repeat Institutional Readers:

Factset: Request User/Pass

Bloomberg, Reuters, Refinitiv, Zacks, or IB users: Access Here.