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.
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