Earnings Trades: CALL and DXCM

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Quick Review of 2012

I've covered two penny stocks so far in 2012. FrogAds (OTC BB: FROG), and Liberator (OTC BB: LUVU).

Here's a quick update on both situations. I tried to pick a bottom for a bounce in FROG (yes, pun intended), and missed by a couple of days. The stock is bouncing now. We started with this idea back in December, and it was really good to us the first go round. The first entry level was $.41, and the stock ran up to a high of $.58 over the next two trading days.

Over the holidays FROG pulled back in quiet trading, and hit a low of $.25. Last week, I suggested it was ready to rally in the $.30 to $.33 range, but I was off by a couple of days. The stock dropped a bit lower before beginning a serious rebound, which is underway now.

FROG traded big volume yesterday- 1.4 million shares- it's highest day ever, and today has traded over 500,000 shares already.

Early this week, FROG announced a substantial increase in traffic- Alexa ranks their site 61,228 globally, and 35,300 in the US. Anything under 100,000 is considered top tier. The stock is getting some nice traction on this news, and trading really strong volume.

I hope the stock can find its way back into the $.40 range on this surge. If so, traders might consider taking a profit- investors just hang in there for a while as their traffic grows.

Liberator (OTC BB: LUVU) is trading rather quietly. I introduced the company at $.15, and today the stock is $.20, for a solid short term gain of 28% over a couple of weeks. This stock is still trading rather quietly, but volume has increased nicely over the last couple of days, hitting about the 120,000 share level both days.

While that doesn't seem like a lot of volume, it's worth remembering this stock had never traded until it was introduced in the OTC Journal, shortly after which it hit a high of $.225 for a 50% gain in the short term if you jumped in early.

LUVU will have a record Q4 '11 of $4.2 million, and is nearly certain to be a $20 million plus company in CY 2012. I also expect the company to turn cash flow positive in CY'12. In other news, research firm Goldgaber Research pegged the stock at $1 in the next 12 months, citing "The progress the franchise is becoming a main stream brand."

If you'd like to read the Goldgaber Research piece, just click here, and off you go.

In summary, FROG is highly volatile and trading a lot of volume- LUVU is not as volatile and starting to catch the attention of investors. IF FROG surges 20% to 30%, you might consider taking a trading profit. LUVU is at a good level to hold or open a new position. 

Two Earnings Trades

I've been reaching out to my vast network of contacts in the small stock world, and believe I have two candidates that will deliver big earnings upside surprises when they release their Q4 and full year audited numbers. Since this publication is committed to low priced stocks, I'll show you how to make a lot of money if you pledge just a little capital.

The two names are Dexcom (NASDAQ: DXCM) and Magic Jack (NASDAQ: CALL).

Magic Jack (NASDAQ: CALL) is the company that advertises incessantly about its $17 annual fee for your phone service. Sources who reported to me after the recent Consumer Electronics Show in Las Vegas last year inform me that a recent technology change is allowing the Magic Jack solution to function extremely well, and adoption is consumers are not adopting the product far more rapidly than in the past.

As you can see from the chart, the stock is already starting to price in a big change. The stock recently split 2 for 1, and investors generally expect splits to lead to higher prices. Analysts are estimating the company will earn $1.01 in 2012, up from EPS of $.07 in 2011.

I haven't been able to find out when CALL will release it's audited 2011 year end numbers. The company legally has until March 15. However, I would expect it to be sometime in February.

I believe CALL is going to beat estimates quite handily, and there's a lot of upside in this one from current levels.

Dexcom (NASDAQ: DXCM) is a stock I've followed since it's IPO in 2005. I ecommended this stock in 2005 out in front of the company's first FDA approval. The stock went from my original entry level of $16 to $26 on that trade. I recommended selling the stock at $24, and made $50,000 on that trade myself.

DXCM is a medical device company focusing on the diabetes market- specifically the difficult to treat Type 1 version- at this time. FDA Approvals will be sought for other versions as well. In the past couple of years sales have improved markedly as the company was able to get an insurance code which allows for insurance coverage of their device.

DXCM has developed a small sensor which is implanted into a patient's abdomen- it's not much more invasive than an injection. The sensor provides real time blood glucose data to a device that is about the size of a cell phone. The patient can monitor their blood chemistry in real time, and administer the proper amount of medication to keep their blood glucose levels in the normal range as needed.

Analysts are underestimating the rapid growth at the company as diabetes is reaching nearly epidemic proportions on a global basis. I expect the company to turn in far better numbers than the street expects.

Yahoo's earning calender has DXCM announcing on Feb 29th. Analyst are expecting a loss of $.17 per share.

When trading on anticipated earnings surprises to the upside, it's important to recognize the stock is likely to trade up into the earnings report, surge at the open, and then retreat swiftly as sellers who were betting on the numbers lock in their gains.

Since this is primarily a penny stock newsletter, let's look at how we might be able to make a lot of money with a little capital. If you want to bet on the year end earnings releases for both of these stocks, your best bet for a little money is using options.

To go long, you can either buy call options, or go short the puts. With options, you always want to be a seller if possible. However, if you go short the puts, the most you can make on the trade is the amount of money you have at risk. You hope the put goes to zero, and you double your investment.

Going long the calls provides more upside, but you'll generally pay a higher premium.

In the case of CALL, I would recommend:

  • The March $15 calls which you can buy at $1.40. if you buy 10 calls, it runs $1400, and it represents the right to buy 1,000 shares.
  • For a greater risk/reward, go to the March $17.50 calls at $.50. $500 gets you the right to buy 1,000 shares at $1.7.50.

In the case of DXCM, I would recommend:

  • The March $10 calls which you can buy at $1.40 as well. If you use a limit order, you might be able to get them cheaper. Again, a $1400 investment in 10 calls controls 1,000 shares at $10.
  • For a greater risk reward scenario, the $12.50 March calls are only $.45. That might be the way to go. $450 controls 1,000 shares at $12.50. With the stock at $10.50 that might seem a little silly, but if the stock ends up at $15, you'll be ringing the cash register.

There's a couple of earnings trades for you for the upcoming earnings releases, and a way to pledge a little money to either make a lot, or lose a little. Be ready to sell these ideas on the days their year end earnings are released. With both stocks in strong uptrends, you should lock in now if you like these ideas.

More soon.

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