Stocks Higher As Facebook, 4 Others Reach New Buy Zones

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Facebook ( FB ),

Alibaba ( BABA ) and other highly rated stocks getting to ready to report earnings, it's time to build your earnings season watch list and follow sound rules for how to buy stocks set to release their latest numbers.

[ibd-display-video id=2354661 width=50 float=left autostart=true]Alibaba has bounced back into buy range from a 177.10 entry in an ascending base. The Chinese e-commerce giant is now at the upper end of that buy zone as it gets set to report earnings on Nov. 2. Meanwhile, Facebook has jumped into a new buy zone with Q3 earnings on tap for Nov. 1.

Boosted by strong Q3 earnings reports from fellow FANG stocks

Amazon ( AMZN ) and Google parent

Alphabet ( GOOGL ), Facebook is now 3% above a 175.59 buy point.

Amazon and Alphabet, as well as the fourth FANG stock

Netflix ( NFLX ), are all now within buy range.

Like Facebook, fellow IBD 50 member

Guidewire Software (GWRE) has been forming a base with earnings due soon, making it a good case study for how to approach possible new buys before a company releases its latest performance numbers.

Stock market investing is all about calculating risk and keeping the odds in your favor. So, particularly during earnings season, how do you assess the risks of buying a stock like Guidewire that has a track record of strong growth, but weak estimates for its next earnings report?

On Sept. 6, Guidewire announced that EPS growth spiked from 14% to 51% for the fourth quarter of fiscal 2017, ended July 31. The stock rose over 9% the next day on volume 359% above average.

Sales growth increased for the second straight quarter, from 25% to 28%.

But for Q1 of fiscal 2018, analysts expect the provider of cloud-based claims management and billing software for the insurance industry to post an 800% decline in earnings when it reports at the end of next month.

While that's a warning sign that could mean there's trouble ahead for the company, Guidewire may benefit from those low expectations: A lower-than-anticipated decline could send the stock sharply higher.

How To Buy Stocks During Earnings Season

While you can't take all of the guesswork out of investing, you can manage and mitigate your risk by following some basic rules.

  • Wait for the stock to break out in heavy volume. Avoid the temptation to jump in early. Let the stock prove itself with a solid breakout. Such patience significantly reduces your risk and still leaves you plenty of potential upside.

  • Avoid buying a stock just before it reports earnings. As every investor knows, an earnings report - a seemingly "good" or "bad" one - can send a stock sharply higher or lower. If you buy just a few days before the company reports, you likely won't have enough of a profit cushion to protect you from a sudden, post-earnings drop.

  • Focus on stocks that pass your buying checklist. While no stock is perfect, the more passing grades a stock has for the key stock-picking criteria , the more likely it is to have a sustained climb. If the stock you're watching has many failing scores, it's probably a sign to keep your powder dry for the time being.

Does Guidewire Pass Or Fail?

If you use IBD Stock Checkup and a Buying Checklist to evaluate your stock ideas, you'll find that Guidewire earns a mix of pass, neutral and fail ratings, while Facebook scores a passing grade for nearly all the key fundamental and technical performance metrics.

On the positive side, Guidewire comes up just short for its 95 Composite Rating . Ideally, your stocks will have a 95 or higher score.  But Guidewire earns passing marks for ts 93 EPS Rating, A SMR Rating, which tracks sales growth, return on equity and profit margins, and its two quarters of rising fund ownership.

Note also that Guidewire is the No. 1-ranked stock in the financial software industry group.

On the downside, Guidewire comes up short in terms of EPS growth estimates for the current quarter and for the current fiscal year (-8%). It also earns a failing grade for its 9.4% annual return on equity, which is below the 17%-or-higher benchmark.

How should you interpret those mixed signals? Let the chart action and general market conditions be the ultimate decision makers for Guidewire, Facebook or any other stock.

If the relative strength line moves into or near new high ground as Guidewire clears its 81.56 buy point in volume at least 40% above average, it could be an opportunity to buy, keeping in mind the second rule above. Also make sure the general market is in a confirmed uptrend at the time.

As Guidewire Software and its insurance industry peers understand well, there are no guarantees in life. So be sure follow defensive sell rules in case any trade goes against you after you buy.

On Tuesday, Guidewire closed over 3% higher in above-average and rising volume, putting it just 2% below the buy point.


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