It’s best to catch investors in a good mood. If companies deliver bad news when they are optimistic, then they will often shrug it off. Yet, when the collective investor mood sours, even the best news can be ignored by the crowd.

That’s surely been the case in recent weeks as positive earnings reports have been overlooked on many occasions. But don't be fooled. Focus on these companies now and you’re bound to see upside when the market shifts back from pessimism to optimism.

I looked at dozens of companies that surpassed earnings expectations, saw their forward estimates move higher and still the stock slumped since the quarterly conference call. In some cases, these stocks saw a brief post-earnings surge. Yet, in every case, they saw a subsequent pullback to levels lower than before their Q2 earnings report.

They may not be absolute bargains in terms of price-to-earnings (P/E) ratios, but these companies clearly have earnings momentum in place, and are likely to get more credit for that when the current market choppiness passes.

1. Capital One Financial (NYSE:COF)

To be sure that these stocks will perform well in the future, it's crucial to look at the factors behind better-than expected profit results. For this credit card issuer, the upside came from a reversal in credit provisioning, which means that the level of delinquent accounts on its books is falling. That may seem like a one-time event, but instead it should be seen as an endorsement of the fiscal health of credit card borrowers.

Even at a time of low interest rates, which will compress net profit margins for credit card issuers as re-invested cash gets low returns, Capital One’s net interest margin remains a healthy 6.3%. That figure could expand by a full percentage point over the next few years as interest rates normalize, which would set the stage for more robust profit growth through this economic cycle. As it stands, Capital One is valued right around book value and 10-to-11 times projected 2014 profits.

2. Boeing (NYSE:BA)

It shouldn’t come as a surprise that the world’s largest aircraft manufacturer exceeded profit estimates by more than 10%. It has done so almost every quarter for several years. That’s because analysts prefer to use conservative assumptions regarding airplane production output and Boeing typically ends up producing more planes than analysts anticipate.

Still, you have to be impressed by a company that repeatedly beat expectations and boosts guidance. Boeing expects to earn about $8 a share this year, but analysts predict that that target is still too conservative.

Shares of Boeing are slumping on fears that the current global crises may eventually crimp demand for new planes. Yet Boeing’s order book is so strong that even a modest level of cancellations would still leave its factories humming for many years to come. Perhaps it will take another “beat-and-raise” quarter for investors to regain their ardor for this stock, which along with GE (NYSE:GE), has been the weakest performer in the Dow Jones Industrial Average (DJIA) this year.

3. Home Loan Services (Nasdaq:HLSS)

When owning a high-yield stock, it’s crucial to track the underlying health of the business model to ensure that dividend payouts don't surpass earnings. This mortgage servicer has no such problem: Profits are strong and growing stronger. Thanks to a third straight estimate-beating performance, EPS are now expected to rise roughly 25% this year, to around $2.50 a share in Q3.

HLSS’s current impressive payout, which generates an 8.5% dividend yield, should remain quite stable. Merrill Lynch’s analysts think “the yield that will prove stable over a range of economic backdrops. Given demand for high-quality, yield-oriented investments that are not cyclically correlated, we think there is potential upside for both earnings and the stock, as financing costs improve along with earnings visibility.” Merrill’s $26 price target suggests 20% share price upside, and with that yield, a nearly 30% total return.

Risks to Consider: As noted earlier, the reliance on one-time boosts can give only the impression of earnings momentum. That’s why it’s crucial to see that forward estimates are also being boosted by analysts.

Action to Take --> If the past earnings season wasn't so choppy, these stocks would likely have rallied higher on the heels of solid Q2 results and forward-looking outlooks. The temporary stall of the market means these stocks are waiting for investors to hop on broad before they get going.

No strategy can protect investors from all market turmoil, but this one comes close. After months of research, my colleague Nathan Slaughter has proven that a special group of "Total Yield" stocks protect investors from even the worst downturns. Not only has the strategy returned an average of 15% per year since 1982, but it's outperformed the S&P during the "dot-com" bubble and the 2008 financial collapse too. To learn more about the Total Yield strategy, click here.

]]>

Related Articles
  1. Trading Strategies

    How To Buy Penny Stocks (While Avoiding Scammers)

    Penny stocks are risky business. If want to trade in them, here's how to preserve your trading capital and even score the occasional winner.
  2. Mutual Funds & ETFs

    ETF Analysis: Vanguard Total World Stock

    Learn about the Vanguard Total World Stock exchange-traded fund, which invests in stocks located in numerous countries with a high level of diversification.
  3. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  4. Retirement

    The World's Most Luxurious Retirement Destinations

    If money is no object (or if you would just like to dream), these five spots are the crème de la crème.
  5. Investing

    How To Calculate Minority Interest

    Minority interest calculations require the use of minority shareholders’ percentage ownership of a subsidiary, after controlling interest is acquired.
  6. Markets

    Moral Hazard in the Chinese Market

    The Chinese government faces the issue of balancing its desire to maintain stable markets through manipulation with the danger of a looming bubble if stock prices run up too much.
  7. Credit & Loans

    Can Corporate Credit Cards Affect Your Credit?

    Corporate cards have a hidden downside. If the company fails to pay its bills, you could be liable for the amount and end up with a damaged credit rating.
  8. Mutual Funds & ETFs

    ETF Analysis: BioShares Biotechnology Products

    Learn more about the BioShares Biotechnology Products fund, an exchange-traded fund that is focused on producers of FDA-approved drugs.
  9. Mutual Funds & ETFs

    ETF Analysis: SPDR EURO STOXX 50

    Learn about FEZ, the Euro Stoxx 50 ETF. FEZ tracks the 50 largest companies in Europe, making it the Dow Jones Industrial Average of Europe.
  10. Mutual Funds & ETFs

    ETF Analysis: ProShares UltraShort Nasdaq Biotech

    Learn more about an innovative inverse-leveraged sector exchange-traded fund, or ETF, the ProShares UltraShort Nasdaq Biotechnology fund.
RELATED TERMS
  1. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  2. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  3. Dividend Yield

    A financial ratio that shows how much a company pays out in dividends ...
  4. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
  5. Operating Margin

    A ratio used to measure a company's pricing strategy and operating ...
  6. Cost, Insurance and Freight - CIF

    A trade term requiring the seller to arrange for the carriage ...
RELATED FAQS
  1. Are spousal Social Security benefits taxable?

    Your spousal Social Security benefits may be taxable, depending on your total household income for the year. About one-third ... Read Full Answer >>
  2. What are the best ways to sell an annuity?

    The best ways to sell an annuity are to locate buyers from insurance agents or companies that specialize in connecting buyers ... Read Full Answer >>
  3. How are non-qualified variable annuities taxed?

    Non-qualified variable annuities are tax-deferred investment vehicles with a unique tax structure. After-tax money is deposited ... Read Full Answer >>
  4. Why would someone change their Social Security number?

    In general, the Social Security Administration, or SSA, does not encourage citizens to change their Social Security numbers, ... Read Full Answer >>
  5. Are spousal Social Security benefits retroactive?

    Spousal Social Security benefits are retroactive. These benefits are quite complicated, and anyone in this type of situation ... Read Full Answer >>
  6. Is Argentina a developed country?

    Argentina is not a developed country. It has one of the strongest economies in South America or Central America and ranks ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!