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An Irresistible Pre-Earnings Trade

In some ways, buying a falling stock in front of earnings isn’t a smart thing to do. There is always the chance that there are people out there who know more than you do and that the drop is the result of that knowledge. Furthermore, it could be argued that when sentiment around a stock is extremely negative, even what looks like a generally good earnings report will be picked apart for weaknesses to justify more selling. However, for those of us with a more contrarian trading style, a big decline in the price of a stock in the runup to earnings sometimes looks like an opportunity. It sets up a sell the rumor, buy the fact scenario, where profit taking will limit the downside even if the results miss expectations, and it also means that the whisper number is probably way below the published analysts’ estimates, so even an average quarter will look good.

That is why, even though the beginning of June looks like this, I intend to buy Canadian Solar (CSIQ) in front of their calendar Q2 earnings release, which is scheduled for Tuesday, August 22nd.

CSIQ’s drop hasn’t just been about upcoming earnings. It has also been a result of weakness in China, a key market for them. That part of it I understand in some ways, but it looks to have gone too far, especially considering that economic weakness in China is not the same in its scope and implications as weakness in the West. The Chinese government can target stimulus quite easily, and is…

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