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Tickers in this Article: NKE, CCL, HST
As the market twitches up and down, a good way to find solid companies with momentum behind them is to look at the consistency of their earnings. Generally you look for stocks that have beat or have raised their earnings estimates over a few quarters. This will give you companies that are continuing to see their earnings do well, and also this would be an especially promising statistic given the sluggish general economy.

A second way that you can take advantage of earnings momentum is to look for companies with declining earnings. These companies miss their estimates often or cut estimates with a more cautious guidance. When this happens, there might be more downside potential in the stock in the future.

Some stocks that are experiencing rising and falling earnings are: Nike (NYSE:NKE), Carnival Corp. (NYSE:CCL) and Host Hotels & Resorts (NYSE:HST). (For more about guidance, read The Flow Of Company Information.)

Nike Continues to Deliver
With many investors concerned about the health of earnings, Nike has been punished for no reason other than fear. On September 24 the company easily beat analyst estimates of 92 cents per share delivering earnings per share of $1.03. Over the past four quarters the company has consistently beat analyst estimates and raised guidance. With more than $3 billion in cash, Nike has a very strong balance sheet. What all of this means is that we have a potential buying opportunity to pick up shares in a very strong company that has rising earnings momentum and solid fundamentals.

Carnival defies the Odds
There are many people who have decided to go shorter distances or even stay home instead of travel. There is a decline in international travel, according to a TNS American Traveler Study. Rick Cain, senior vice president of TNS, cited high energy prices, reduced vacation time from employers, and the weakening U.S. dollar as the reasons for lower levels of traveling. In the face of all of this, Carnival continues to surprise everyone who expected the cruise line to have a dramatic decline in EPS. In fact, nothing could be further from the truth. Some recent evidence of this was when the company reported its latest quarterly earnings on September 18.

According to Thompson Reuters, analysts were expecting EPS of $1.58, but the actual number came in at $1.65. Chairman and CEO Micky Arison said, "Although bookings have slowed compared to the strong booking levels of a year ago, pricing is holding up well given the current difficult economic environment." Over the past four quarters Carnival has beat the analyst estimates consistently. What all of this means is that the company is continuing to beat the odds in the face of numerous head winds.

Host Hotels & Resorts remains Weak
Host Hotels & Resorts earnings continue to suffer in the harsh economic environment we are seeing. The real estate investment trust (REIT) is being hit hard by the slowdown in both business and consumer related travel. This is a sign that the worst is not over for Host. In fact, we could continue to see weakness with them well into next year. Some recent evidence of this came when they reported their quarterly earnings on October 10. The REIT beat analysts estimates coming in at 31 cents per share compared the Thompson Reuters estimate of 28 cents per share.

Despite the better than expected earnings, Host cut estimates for 2008 to 81-86 cents versus its previous forecast of 84-94 cents per share. Host Hotels also would not give earnings guidance due to the economic uncertainty. President and CEO Ed Walter said, "Unfortunately, we are continuing to experience slower near-term bookings and the slight increase in attrition rates which suggest that group volume and revenue will continue to decline in both the fourth quarter and at least the first half of next year." This shows that the REIT is continuing to experience downside weakness and that we will continue to see shares decline in spite of their better than expected earnings for the third quarter. (To learn more, read Basic Valuation Of A Real Estate Investment Trust.)

Bottom Line
As we can clearly see there are opportunities from both positive and negative earnings surprises. To take advantage of them we must not only look at what the company did relative analyst estimates, but what their guidance is regarding current economic conditions and what the stock did after the news. If the company beat on the upside and shares are down, this might represent a good entry point. The same holds true if the company beat on the upside yet cut guidance. In this case it might represent a good downside opportunity.

For more analysis, read Can Earnings Guidance Accurately Predict The Future?

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