The Curious Investor

To mark an example of how I go about trying to time earnings beats and time buys into potentially explosive growth stocks, I’d like to highlight the most recent purchase of MEMC Electronic Materials. For those that read this blog, you’ll know that I had been high on MEMC most of this month after reading a report on the silicon wafer industry and the potential of solar energy to increase already strained demand on silicon wafer producers. For more information on the fundamental reasons I like the company, check out my post on WFR at Curious Investments, my blog at NestEggr.

Anyways, here’s a little breakdown of the thought process as MEMC’s earnings came up.

I first found MEMC in early October while screening for stocks with explosive earnings growth and forward PE ratios below consensus estimated for 1 year and 2 year earnings. Upon first look, I could tell immediately that the company’s turn around strategy did seem to be working as historical earnings showed marked improvement in earnings starting two years ago and culminating a terrific run early this year due to an announcement of a new strategy to exploit the solar panel market. (Read the Annual Report)It seems that due to missing some lofty estimates earlier in the year, the rally stalled and the stock seemed to have entered an intermediate term base. The green line marked by 1 in the graph above is what I considered the breakout resistance point. That being said, the channel I drew (marked by 4) were the bounds of the base that ultimately formed. I was excited by the looks of this chart and by the performance of the company’s turnaround strategies. MACD signaled a bullish turn part way through October (2) and I marked off a trendline (3) of what I thought the stock should do for the month leading up to earnings. Properly speaking, one should extend the trendline I drew all the way to the bottom the chart makes at around the middle of August and thus connect all the increasing lows.

My bet would have been that if performance in the stock followed this trend, it would be primed for a technical breakout right around earnings. Unfortunately, some poor news about a manufacturing facility fire turned the mini rally around and for the few weeks before earnings, the stock pulled back a bit after reaching the top of its base channel. This kept me from buying prior to earnings as I was worried that the market might have begun pricing in something I was not aware of. It turned out that MEMC’s earnings report was just the catalyst needed to breakout of the base. The stock jumped 15% smashing through both of the upper resistance lines that I drew on tremendous volume. I bought with the ensuing push and expect the stock to continue to ascend to higher highs.

So, what is the thought process behind this? It’s a trust that the market as whole disseminates what it knows through pricing changes leading up to an earnings report. Knowing the broad strokes that the company had an effective operations strategy in place gave me confidence that the stock was bound for appreciation. The establishment of an intermediate term base showed that market participants had accepted a fair valuation for the company at a certain price level and were waiting for some sort of catalyst to prove further appreciation. An upcoming earnings report proved an effective and dependable catalyst for a breakout. My only wish is that I had the guts to buy ahead of earnings. This strategy does involve a lot of qualitative judgments and is not necessarily a fool proof mechanical approach. That being said, in further case studies, I will hope to show that this type of analysis can work consistently as certain qualities of companies will appear over and over. Furthermore, these qualitative/fundamental characteristics act in cohort with widely accepted pricing chart patterns and as a result should allow you to invest in such stocks with conviction and success.