'Twas the Night Before Earnings...

(SOL) announces their First Quarter results tomorrow morning before the market's open. I think most investors would admit that the time leading up to their stock's earnings release is stressful.

I've seen stocks blow away numbers and drop on guidance. I've seen stocks meet analyst's estimates and sell off. I've seen companies miss and really get hammered. The night before earnings, it's hard not to imagine the worst.

A good rule of thumb I try to follow is not buying a stock within three weeks of earnings. This allows for a profit cushion to be built up prior to the announcement and allows more options. If the stock doesn't move as expected, I can sell it before the announcement. If it does increase in price, I now have some profit in case the stock gaps down on the earnings news. As I've discussed previously, I'm looking to never take more than an 8% loss in a stock, so a 15% gap down on earnings could be pretty devastating.

There are a couple of behaviors I've seen stocks exhibit commonly the week leading into earnings. One is that they'll catch some serious buying interest. I don't know if this is speculators or funds that don't want to risk paying more after an earnings beat. The other is the stock will sell off. I assume this is folks who, for whatever reason, don't want to take the earnings news risk. I have not noticed any correlation between the action of a stock right before earnings and the earnings themselves. Someone may have inside info, but the majority doesn't.

I guess that brings me back to (SOL). This one broke the mold. I had a nice profit cushion and expected a quiet few days leading into earnings. I even planned to buy more if the earnings were good and it passed $18.95 - ten cents above the previous high. Instead, in the past three days is exploded 24% from $17.43 to $21.67 on massive volume. Today's volume was the highest ever, and it was up 15%. What to make of that?

On the one hand, I'm afraid of a 'sell the news' scenario. Sometimes when the market expects some good news, the stock will move up in advance of it, and then the smart money will sell into the news and shortly after the stock will begin to drop.

I'm also concerned how much more this stock can run without taking a break. It's up 52% from the $14.29 buy point on April 15th. I wonder if it makes a big move on earnings tomorrow if it will soon after go parabolic (retrace right back to the buy point and even lower).

I don't think either of those will happen though. I think this is the right stock at the right time. They've raised guidance on favorable supply contracts. Almost every stock in the solar group is beating estimates and raising guidance. There is a very small amount of fund ownership in (SOL), when I bought it there were none reported and it just ticked up from four to five yesterday. That means these funds are probably still building their positions, and there is plenty of room for more to buy in. The move up in price was on huge volume, indicating something more than speculation. Even with the recent move in the price, the 2009 forward PE is still a ridiculously low 12.

No, I think there are more reasons to be optimistic than to worry. I'm going to hold on for now and see how far this ride goes.

-Geoff