Stock Market

7 Stocks to Buy (or Sell) Ahead of February Earnings

This earnings season is particularly mixed, making the list of stocks to watch before earnings especially impactful if you’re interested in directional trades. Even if not, keeping a close watch on some major stocks ahead of their earnings date can help give you a better idea of how the overall market landscape is developing – for good or for bad.

The S&P 500 is marking all-time highs, and of the companies in the index that reported thus far, nearly 70% posted a positive EPS surprise. Great news, right?

Despite individual company strengths (or analysts’ misaligned expectations), the index’s collective earnings marked a 1.4% year-over-year (YoY) decline – not a particularly bullish indicator, considering how different the sentiment was this time last year. Likewise, though many companies have yet to report, a sizeable percentage are offering negative EPS guidance as they face greater uncertainty than current index pricing indicates.

What all this means is that, increasingly, we can’t rely on a “stocks go up” theory of earnings when evaluating short-term trades. At the same time, though, some overbought individual stocks seem to be a house of cards propping up a shaky market – making bets on them a risky proposition.

Here are a handful of top stocks to watch before earnings – alongside whether or not they’re worth a buy at this stage in the game.

Buy: Palantir (PLTR)

Earnings Date: Monday, February 5th (After Hours)

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Among the many well-known stocks reporting in February, Palantir (NYSE:PLTR) is the easiest to call a Buy today. After four consecutive profitable quarters, the AI and data analytics software firm is well on its way to marking its fifth. Right now, analysts are projecting earnings roughly aligned with last quarter’s, which hit a $0.07 EPS. If the thesis bears out, that represents a 100% jump on a YoY basis, which supports the collective consensus that the company will grow 85% annually over the next five years.

A major tailwind for Palantir is that it’s now eligible for S&P 500 inclusion after four consecutive profitable periods. Palantir is already larger, by market cap, than 3/5 of the current index holdings. At the same time, applied AI will likely continue propelling Palantir forward. In many cases, the AI bubble is borderline bursting – “normal” companies, i.e., those without a clear AI use case, failed to demonstrate how adopting current AI tech benefited their bottom line. That’s despite the constant usage of AI-adjacent buzzwords in marketing materials and earnings calls.

But Palantir is one of the few companies with a clear, demonstrable, and viable AI platform that existed well before the current craze. Palantir’s wide-ranging AI offerings help across unique use cases, including combat targeting, intelligence, corporate data insight, public health forecasting, and more. As investors lose enthusiasm for AI labeling stamped across every company’s face, Palantir stands out as one of the few that will weather the imminent drawdown.

Sell before Earnings: Chipotle (CMG)

Earnings Date: Tuesday, February 6th (After Hours)

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Chipotle (NYSE:CMG) consumer sentiment is slowly turning against Chipotle, as a cursory social media search sees scores of dissatisfied customers complaining about slow and incorrect orders, poor ingredient quality, and a general feeling that the once-hot burrito company isn’t what it used to be. This is likely due, in no small part, to increased emphasis on cost-cutting at the expense of what made Chipotle the hot stock it is today. Of course, quantifying social sentiment of this type is difficult, but a look at CMG’s fundamentals reinforces a Sell rating.

From the outset, CMG’s basic ratios skew far too high for comfort, trading at 55x earnings and 22x book value. Likewise, it trades at 1.75x earnings growth – all of which indicates gross overvaluation in light of its relatively precarious position as a pricy fast food alternative, social sentiment aside. The company’s YoY EPS growth is strong, to be sure – nearly 40% in last year’s report, but the stat is trending downward to align itself more closely with CMG’s 10-year growth average of just 13.86%.

Ultimately, Chipotle is a restaurant mainstay, and the stock isn’t going anywhere soon. But its current per-share price is far too overblown to be worth investing in now, and if you’re a shareholder, I’d be concerned that just a hint of bad news could send shares tumbling faster than it takes to order a burrito bowl.

Buy: McDonald’s (MCD)

Earnings Date: Monday, February 5th (Pre-Market)

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On the fast food flip side, McDonald’s (NYSE:MCD) remains a strong Buy as it prepares to be one of the first stocks reporting earnings in February. Across the board, top analysts are bullish on McDonald’s. One Wedbush analyst said that it’s “hard to see McDonald’s not ‘winning’ in any consumer environment.” At the same time, a Jefferies rating expert took to CNBC to call McDonald’s a top pick in the restaurant industry as the “best defensive and offensive play in restaurants,” with “resiliency in an uncertain or weak macro [economic climate].

But the widely enthusiastic endorsement isn’t backed up by MCD’s per-share pricing; the stock climbed just under 8% over the preceding 12 months and lost about 2% since January 1st. A tough 2022 didn’t help the cause, as McDonald’s posted an annual revenue and income decrease alongside a slim margin improvement. But, on the heels of right-sizing operations and improved economic outlook, analysts expect the company to post a 7% EPS jump and 9% revenue growth in its upcoming earnings.

Sell before Earnings: PayPal (PYPL)

Earnings Date: Wednesday, February 7th (After Hours)

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Despite the CEO’s plans to “shock the world,” PayPal (NASDAQ:PYPL) seems destined to disappoint this earnings season. In a bizarre attempt to ape Steve Jobs’ vibe, the “next big thing” in payment processing turned out to be new checkout procedures that “[replace] cumbersome password inputs with biometric alternatives like face or fingerprint recognition.” That’s right – PayPal’s revolutionary news is that it finally caught up to a range of existing applications that offer exactly that.

Unsurprisingly, shares dipped slightly after the underwhelming Innovation Day proceedings, though the stock is up slightly since the month began. But it may not stay solid for long, as PayPal’s house of cards could quickly crack on just a hint of poor outcomes. PayPal’s market share domination sets it apart from the competition, to be fair. But competition is increasing, and though PayPal tends to be a top pick for computer-based payment processing, it lags significantly on mobile – where the bulk of tomorrow’s digital shoppers buy things today (see the next paragraph for specifics!).

Buy: Apple (AAPL)

Earnings Date: Thursday, February 1st (After Hours)

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Though I alluded to the company in the previous paragraph, Apple’s (NASDAQ:AAPL) recent pivots point to long-term strength that makes the stock a buy despite its fairly high per-share pricing. Specifically, Apple’s emphasis on services – like Apple Pay and its podcasting platform – represents a cheap, high-margin flywheel that’s already dominating some specific consumer sectors.

The top-line stats for Apple Pay alone are, frankly, astonishing. They reinforce the bull thesis for Apple while cementing PayPal’s increasing irrelevance to tomorrow’s shopping ecosystem. Apple Pay has already captured 92% of the digital wallet marketplace, processing 12.6% of all online consumer payments in 2023, with 48% of customers using the digital wallet for in-person transactions. Those stats mark a new age for Apple while signaling a death knell for PayPal’s past dominance.

From a hardware perspective, Apple is also focusing on creating greater verticals throughout its supply chain to protect against the kind of geopolitical shock we see with increased regularity. The company’s renewed in-house component production efforts will help it cut costs while ensuring quality and, of course, protect against supply chain shocks moving forward.

Sell before Earnings: Alibaba Group (BABA)

Earnings Date: Wednesday, February 7th (Pre-Market)

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Saying that Alibaba Group (NYSE:BABA) is a Sell is a tough call. On one hand, the company’s per-share pricing is closer than ever to its IPO debut cost and worth just a third of its 2020 high. And, unlike many other ZIRP-era high flyers, BABA isn’t a flash in the pan.

Unfortunately, pure economic risk in China puts too much pressure on this stock to make it worth buying before earnings. And, while that topic is a bit too complex to look at, other factors are pressuring BABA stock that make it worth selling before earnings.

Despite its size, there’s little real moat involved in BABA’s operational model. That’s clear as a primary competitor, Piunduoduo (NASDAQ:PDD) beat BABA as the top eCommerce stock in China. Both companies’ core value proposition is rock-bottom pricing. But, while BABA focused on overseas manufacturing, Piunduoduo’s China-specific emphasis lets it snag market share away. At the same time, those supply chain shocks mentioned in the last paragraph pressure BABA’s overseas shipments, and companies are increasingly looking elsewhere, like Latin America, for scaled production.

Sell: Affirm Holdings (AFRM)

Earnings Date: Thursday, February 8th (After Hours)

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I covered the Sell thesis behind Affirm Holdings (NASDAQ:AFRM) last week, but it’s worth revisiting before the company posts earnings. This is also a fairly contrarian position, as the stock surged more than 185% over the past year. But I think this bubble is about to burst soon, if not after this upcoming earnings report.

You probably recognize that Affirm’s core business revolves around its buy now, pay later (BNPL) model. This model essentially provides consumers with short-term micro-loans at the point of sale. However, for better or worse, the BNPL solutions tend to attract consumers with less-than-stellar credit. With credit card delinquency rates on the rise, it seems inevitable that Affirm will face a surge in unpaid BNPL loans.

Affirm’s latest financial statements reveal a significant increase in its allowance for credit losses (expected delinquency write-offs), which surged by over 10% year-over-year. This uptick occurred even before the holiday sales season when tons of consumers undoubtedly maxed out their credit cards and relied heavily on Affirm’s BNPL services. Given the current consumer and macroeconomic trends, the short-term outlook for Affirm appears bleak, positioning it as one of the top stocks to sell before earnings.

On the date of publication, Jeremy Flint held no positions in the securities mentioned. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Jeremy Flint, an MBA graduate and skilled finance writer, excels in content strategy for wealth managers and investment funds. Passionate about simplifying complex market concepts, he focuses on fixed-income investing, alternative investments, economic analysis, and the oil, gas, and utilities sectors. Jeremy’s work can also be found at www.jeremyflint.work.