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.
TaxesYour volunteer ventures could earn you some welcome tax deductions, along with the satisfaction of helping others.
RetirementA traditional IRA gives you complete control over your contributions, and offers a nice complement to an employer-provided savings plan.
RetirementFully funding someone’s life for three decades without work is tricky. The result is retirement has become, for many, a 30-year adventure.
RetirementThough dreamed of by many, for most, early retirement is not a viable option. Instead, consider a midlife career change.
TaxesCheating on your taxes is asking for trouble. You might get away with it, but you’re playing with fire and likely to get burned.
BudgetingIf you’re worried medical expenses could overwhelm you, there are some thing you can do to ease your concerns.
InsuranceMedicare is the United States’ health insurance program for those over age 65. Medicare has four parts, but you might not need them all.
InvestingThere are two broad schools of thought for equity income investing: The first pays the highest dividend yields and the second focuses on healthy yields.
EconomicsAfter the Paris attacks investors are focusing on central bank policy and its potential for divergence: tightened by the Fed while the ECB pursues easing.
RetirementExplain how to use an IRA account to buy investment property.
Investors can have both a 401(k) and an individual retirement account (IRA) at the same time, and it is quite common to have ... Read Full Answer >>
All contributions to qualified retirement plans such as 401(k)s reduce taxable income, which lowers the total taxes owed. ... Read Full Answer >>
401(k) rollovers are generally not taxable as long as the money goes into another qualifying plan, an individual retirement ... Read Full Answer >>
Federal Housing Administration (FHA) loans were created to promote homeownership. These loans have lower down payment requirements ... Read Full Answer >>
Apple Pay is a mobile payment system created by Apple to reducing the number of times shoppers and buyers have to pay for ... Read Full Answer >>
he When you make a down payment from 3 to 20% of the value of your home and take out a Federal Housing Administration (FHA) ... Read Full Answer >>