3 Earnings Reports to Avoid Next Week

It's time for round three in the fourth quarter! In my previous two attempts to name stocks worth avoiding this earnings season, I cautioned against a total of six companies that investors should tread lightly around. In all cases so far, I've either been correct or I'm still waiting for an earnings report.

Today I intend to narrow my focus solely to companies that are scheduled to report next week. I've uncovered what I suspect will be three earnings reports that investors will wish they had buried in the sand by week's end. While these aren't recommendations to sell, they do serve as warning that I feel significant risk is built into the stock price prior to this quarter's earnings release.

So, without further ado, the three companies are...

Dell (NAS: DELL)
It seems with each passing quarter that Dell's earnings report grows less and less relevant. Tablets, smartphones, and laptops from the likes of Apple (NYS: AAPL) are killing the personal computing industry and Dell's stagnant growth rates are evidence of this. Somehow, though, Dell has managed to significantly top consensus estimates in seven straight quarters. This quarter is where I feel that streak comes to an abrupt end.

Dell's primary advantage over the laptop and tablet sector is in its lower pricing. Sure, desktops are bulky eyesores, but they are dirt cheap relative to laptops. Unfortunately, Dell has been unable to take advantage of its competitive pricing power, and between competition from Hewlett-Packard (NYS: HPQ) and Apple, it has watched its operating margins drop from 8.6% in 2005 to a mere 5.8% last year. The concern I have for Dell is not based so much on its upcoming quarterly report but on its guidance. With sales expected to grow by only 3% in the fiscal year that will end in January 2013, and Apple's quarterly report indicating a potential industry-wide slowdown, I can only advise investors to be cautious heading into this report.

Beazer Homes (NYS: BZH)
What's worse than being a publicly traded company in the housing sector? The answer: being perhaps the worst company within the housing sector. I find it mildly miraculous that Beazer has avoided bankruptcy so far, but a few more quarters in the red could do the trick.

Having not turned a full-year profit since 2006, Beazer Homes has now missed consensus estimates five consecutive quarters -- and these aren't small misses, either. Beazer has reported losses which have been an average of 66% worse than projections in that span. Primarily responsible for Beazer's losses are precipitously falling housing prices and a glut of foreclosed homes crowding the marketplace. Year-over-year sales for the homebuilder have fallen for four straight quarters, so perhaps the only bright spot will be the expected 12% increase analysts are currently forecasting. Still, Beazer is nothing more than a cash-burning machine at present, and its foundation looks like one made of toothpicks, not stone. I'd avoid it.

NetEase.com (NAS: NTES)
NetEase.com is cheap and based in China -- a combination the market has not been kind to over the last year. Since the company is at a mere 11 times forward earnings and has four straight earnings beats under its belt, I'm going out on a limb with this call, but for good reason.

Chinese peers SINA (NAS: SINA) and Sohu.com (NAS: SOHU) are inexpensive as well, but they've both suffered from falling margins. As Fool Keki Fatakia pointed out yesterday, Sohu's operating margins fell by 800 basis points over the year-ago period, while SINA's fell by a smaller, but still unpleasant, 350 basis points. From 2006 through 2010, NetEase shareholders have witnessed a gradual decline in gross margin every year. As I'm not being a cheerleader of the gaming industry at present, and with China's government doing everything it can to slow down growth, NetEase looks primed for failure when it releases earnings next week.

Foolish forecast
It remains to be seen if I will be adding to my winning streak in the coming week or if my luck will finally run out. Either way, you can follow along as I add these plays to my Motley Fool CAPS portfolio, which tracks every recommendation I make.

What do you think is in the cards for these companies? Share your thoughts in the comments section below and consider adding Dell Computer, Beazer Homes, and NetEase.com to your free and personalized watchlist to keep up on the latest news and earnings releases with each company.

At the time thisarticle was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He considers himself a realist, because "pessimist" is such a negative term. You can follow him on CAPS under the screen name TMFUltraLong , track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple, Dell, Sohu.com, NetEase.com, and SINA, as well as creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that polishes its crystal ball daily.

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