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5 Stocks to Buy Ahead of Earnings

When a company reports earnings results, for a brief moment market direction becomes irrelevant. What matters are the numbers, and attempts to predict those numbers can lead to moneymaking trades, even if the overall market activity is completely unpredictable. It sure beats getting whipsawed, never knowing what hit you until it is too late.

With that in mind, here are five earnings trades for an uncertain market.

Pep Boys

The retail sector is being sold broadly during the recent market correction under the assumption that a double-dip recession would greatly impact stocks of companies that rely on consumer spending.

Pep Boys is one of the retailers I expect to do well, recession or not. If indeed there is another recession, look for car owners to increase attempts to get more mileage out of their current vehicles. New-car sales may plunge, but auto part sales should be relatively immune to a downturn.

Pep Boys releases earnings for the period ended July 31 after the market closes on Tuesday. In the prior period, the company missed Wall Street estimates by 7 cents per share. The miss was directly related to supply disruptions in Japan. I would expect a bounce back in the current quarter.

Current estimates have been adequately discounted and are 6 cents lower than where they were 90 days ago. With annual earnings expected to grow by 27 percent from the current fiscal year to the next and shares trading for only 12 times current fiscal year estimates, the stock is very cheap. I would buy this one in advance of Tuesday's report.

Men's Wearhouse

Last week, shares of men's clothing store Jos. A. Bank exploded higher after a very strong earnings report.

Those strong results could bode well for Men's Wearhouse , which reports its results for the period ended July 31 on Wednesday. It has been treacherous trading in the retail space, but a strong report could send shares significantly higher.

Men's Wearhouse has beaten analyst estimates in each of the last four quarters. During that period, shares have gained approximately 30 percent. Those gains include a 24 percent selloff that began in early July. For the current period, the average Wall Street estimate is for the company to make $1.04 per share. That estimate has increased by 6 cents per share over the last 90 days.

For the full year ending January 31, 2012, Wall Street expects the company to make $2.11. That number increases by 13 percent in the following year. With the company beating estimates consistently, growth will likely be higher than expected. I would buy this stock in advance of earnings.

Navistar

Right now the market is intently focused on the future. It's all speculation—and negative speculation at that—with little attention paid to valuation and current expected growth. Investors are telling us that Wall Street estimates are too high. When a company's results prove otherwise, that stock can explode higher.

Truck maker Navistar reports earnings results for the period ended July 31 on Wednesday. After two very disappointing quarters in which the company missed Wall Street expectations, Navistar is looking to turn the tide. Wall Street analysts are expecting as much, but the market is not.

Since May, shares of Navistar are down more than 40 percent. For the current period, profit estimates have been slashed. Ninety days ago, the estimate was for the company to make $1.81 per share. Today, the estimate is for the company to make $1.35 per share. For the full year ending Oct. 31, Navistar is expected to make $5.51 per share.

The opportunity for traders is to exploit the dramatically lowered quarterly estimate and a growth forecast that is fairly impressive. Wall Street has pegged profits for Navistar to improve by 30 percent in the next fiscal year. With the stock trading for only 7 times current year estimates, Navistar is a solid trade to make before the company reports results on Wednesday.

Korn/Ferry

A poor jobs report was not kind to placement firm Korn/Ferry, whose recruiting specialists make money when there are jobs to fill. Shares of Korn/Ferry lost 6 percent on Friday after the jobs report. Those losses are continuing on Tuesday, with the stock down another 2.6 percent.

One would think the bad news was already priced into shares. We all know economic growth will be anemic at best. We also know that unemployment levels are expected to hover around 9 percent. In other words, there is nothing really new in the report. With Korn/Ferry's stock already down around 30 percent since July 21, recent selling would appear to be excessive.

Investors will get a better read on Korn/Ferry when the company reports earnings results for the period ending July 31 on Thursday. During the last four quarters, the company has matched or beaten average Wall Street estimates. Analysts are not showing nearly the panic that investors are exhibiting given that average estimates for the company have increased by 2 cents per share over the last 90 days.

With profits expected to grow by 14 percent from the current fiscal year to the next and shares trading for only 10 times current year estimates, traders might be able to capture rebound gains with a strong report. I would play this one expecting as much.

Smithfield Foods

The market prices defensive stocks—or stocks of companies that will do well regardless of economic conditions—conservatively. You don't see nosebleed valuations here. That said, these stocks are quite cheap today given the across-the-board selling in the market.

Defensive stock Smithfield Foods reports earnings results for the period ended July 31 on Thursday. It doesn't make much sense to me that this company would be worth 10 percent less today than where shares traded in late July. This $3.4 billion meat company is poised to do well no matter what happens with the economy. During the last year, Smithfield has been a steady performer, beating average Wall Street estimates for the last three quarters. In each of those quarters, shares moved nicely higher.

Estimates for the current period are slightly lower than where they were 90 days ago. For the full year ending April 30, 2012, the company is expected to make $2.47 per share. Wall Street is looking for modest growth of 6 percent in the following year. With shares trading for 8 times earnings Smithfield is poised to jump with another earnings beat. I would buy this stock in advance of the news.

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