Stocks To Watch Going Into Earnings Season (AA) (PEP)

Tuesday morning saw mix trading in US markets, as investors wait on a key vote from Slovakia to extend the euro zone bail out fund.  The Slovakian vote is a part of a process to expand the powers held by the European rescue fund.

Slovakia is the last country in the 17 member euro zone to vote, and there has been a growing resistance among member of the four-party ruling coalition.  The amendment must be approved by all euro zone members.  Angela Merkel, Germany’s Chancellor, and Nicolas Sarkozy, President of France pledged over the weekend to present a solution to the debt crisis that is plaguing the region, as well as rescue the region’s troubled financial sector.

After rising over 300 points on Monday, the Dow Jones Industrial Average moved in and out of positive range Tuesday, led by Bank of America (BAC) and Alcoa (AA).  Alcoa is set to kick off earnings season after the bell, and it remains to be seen whether this quarter’s earnings will be a boom or bust for the stock market.

While some analysts argue that company’s will report strong earnings, outshining news that may be worrying the market,  still other believe that companies will issue weak forward guidance, and that the economy will continue to be sluggish.  Most likely, the outcome will be more toward the center as corporations revise their earnings forecasts and markets price in a less dire outlook for profits.

Alcoa Kicks Off Earnings Season

Alcoa Inc. Chart

Alcoa, America’s largest producer of aluminum, is expected to set the tone for the Q3 earnings season.  Although reaching a 52 week high of 18.47 on April 8, 2011, the stock has declined to as far as 8.45 on October 4, 2011.  Analysts have cut their earnings estimates in the past week, and investors will be watching Alcoa’s earnings closely.

The aluminum maker is expected to report that EPS for Q3 2011 grew from $.06 to $.23, as well as a revenue increase from $5.3 billion to $6.26 billion.  In Alcoa’s second quarter report, the company expressed optimism in forecasting an increase in aluminum sales spanning a wide range of sectors, and today’s statement will highlight whether that optimistic view will hold up against a slowing economy.

Alcoa’s shares fell 40% in the third quarter as European demand weakened, and aluminum prices fell.

Alcoa has seen an increase in short interest in the past few weeks, with 4.5% of its shares short.  This is signaling that short sellers are expecting a decline in Alcoa shares following the report.  Short covering is common ahead of earnings, as investors seek a hedge against risk.

While guidance for the aluminum maker is not expected to be particularly bullish, the stock could rise on any news other than a massive loss for the company.  With a 1.16% dividend yield, for buy-and-hold investors, a dip in the stock’s price could prove to be an excellent buying opportunity.

Watch PepsiCo (PEP) This Earnings Season For Tips On Consumer Spending

One of the world’s largest food and beverage manufactures, PepsiCo is set to report earnings Wednesday morning, and investors and analysts will be watching closely, as its results are expected to shed some light on the issues facing the industry, as well as give insight into the minds of consumers and consumer spending – an important aspect in the economy.

Widely expected to report an uptick in profits, PepsiCo had previously lowered its per-share earnings forecast in July, citing growing concerns over rising costs for the company as well as concerns as to how much money its customers are willing to spend.

As with many consumer product corporations, PepsiCo has raised prices to offset higher costs for ingredients, fuel and packaging.  Developed markets such as the US have given rise to an increasingly more cost-conscious consumer, while emerging markets such as Brazil, India and Russia have produced a boom in demand for PepsiCo’s products as disposable income increases in these areas.

PepsiCo could provide investors with exposure to these emerging markets with minimal downside risk, and the stock also pays investors a handsome 3.33% dividend yield, making this a potentially attractive investment option for this earnings season.

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