Poor Guidance and Great Earnings Point to Strong Stock Returns

Earnings season offers investors a number of second chances to buy great stocks. One of the best ways to get an opportunity is when a stock sells off for providing poor guidance. The market likes certainty, and is willing to pay up for it.

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  • While guidance may be weak, a company that’s reporting great earnings should head higher over time, no matter what guidance expectations it makes for investors (if any).

    Cybersecurity stocks stumbled earlier this week after Palo Alto Networks (PANW) reported solid earnings, but gave weak guidance.

    Even after tumbling, shares are still up 75 percent over the past year. That’s because the company has been posting strong growth. Revenues are up 19 percent, and earnings have exploded higher by over 1,970 percent.

    Shares are a bit pricey at over 60 times forward earnings. But if the growth can continue, the valuation should easily catch up in time.

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  • Action to take: Investors may want to buy a stake in Palo Alto in the coming weeks to take advantage of the earnings report selloff. The company’s strong earnings should more than offset its latest poor guidance over time.

    For traders, shares are likely to rebound some of their recent losses in the coming weeks.

    The June $300 calls, last going for about $15.50, could see mid-to-high double-digit returns on a partial rebound in shares in the coming weeks.


    Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any company mentioned in this article.

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