Investors looking for stocks poised to outperform should focus on companies whose improving fortunes might not be fully reflected in their valuations, as outlined in a recent Barron's story. Despite rising global trade tensions over the recent months, the Street's earnings estimates have inched higher, suggesting that business conditions remain strong, particularly for domestic-facing companies. Stocks whose earnings outlooks have climbed in recent months by more than their share prices including Lockheed Martin (LMT), Marathon Petroleum (MPC), Intel Corp. (INTC) and Michael Kors Holdings (KORS).
In the three-month period ended June, earnings estimates for S&P 500 companies rose 0.8%, according to data from FactSet and as reported by Barron's. While a modest gain, the jump is significant as it counters the historical trend over the past decade in which analysts have marked down their quarterly estimates by an average of 5% from a period's start to end. Barron's highlighted real estate, telecom and utilities as sectors that have experienced more estimate increases than cuts, given their businesses depend less on global trade.
|Company||Forward P/E||Percentage Off 52-Week High|
|Michael Kors Holdings||14||5.3%|
Chip Leader Intel Undervalued
Intel Corp. (INTC), while not a domestically focused company like the others highlighted by Barron's, was chosen due to its inexpensive valuation after investors sold off shares on uncertainty following the surprise departure of its Chief Executive Officer (CEO) Brian Krzanich. The stock, up 13% year-to-date (YTD) versus the S&P 500's 4.3% gain, has consecutively beat the Street's estimates by over 20% for three quarters, noted Barron's. Meanwhile, shares are trading at less than 13 times projected earnings for 2018. (For more, see also: Intel a 'Top Pick' Despite Poor Sentiment: Citi.)
Handbag maker Michael Kors, which has seen its stock trade flat over five years due to the heightened threat of competition from players such as Tapestry Inc.'s (TPR) Kate Spade and Coach, also looks like a value play. Its EPS has doubled over the same five-year stretch, while its stock now trades at a modest 15 times projected free cash flow (FCF) for its fiscal year through March. Barron's sees upside in improved pricing as the firm trims inventory and boosts same-store sales growth.
Lockhead Martin, a Defense Play
Military contractor Lockheed Martin, not only a safe bet as the Trump administration ramps up defense spending, looks cheap as earnings estimates rise faster than its valuation. The stock trades at 16 times profits, while its earnings per share (EPS) are expected to rise at a double-digit pace for at least two more years. "Defense spending is probably going to stay strong for a few years," said John Augustine, Chief Investment Office (CIO) at Columbus, Ohio-based Huntington National Bank, as cited by Barron's. As allotments for key aircraft and missiles come in well above Lockhead's initial expectations, more upside surprises could be in store. Last year, the firm beat earnings estimates by 19%. (For more, see also: What Will Trump's Defense Spending Do for Stocks?)