Where did the time go? By the end of this week, Oct. 28,
will have already reached a crescendo (the largest 1,000 U.S.
stocks will have already released quarterly results), so the flow
of new reports starts to slow down after that. An early read on the
current earnings season shows a clear trend: Roughly 69% of
companies are delivering
results that are better than analysts had expected (according to
Thomson Reuters). That's right about in line with the last two
On an aggregated basis, third-quarter sales are up 10% and profits
are up 15%, compared with the same period a year ago. Few would
have expected such a decent outcome with all of the headwinds
and many industries. Another factor: the solid quarterly results --
relative to expectations -- are also the result of analysts cutting
their forecasts too deeply. As a result, companies only needed to
jump over a lower hurdle. And as has been the pattern, forward
guidance appears more downbeat, relative to current forecasts.
Still, it's clear that corporate profits are holding up reasonably
well in such a tough economic environment. This bodes well for
future results if the economy perks up a bit in 2012. So if many
companies are doing well, then which companies are doing really
well? Those companies should look like solid candidates for your
portfolio, at least on the surface.
I scoured the landscape and came up with a dozen stocks that topped
quarterly profits by at least 20%. Here they are...
You can quickly
some clear themes from this group. For example,
Bank of America (NYSE:
soared past estimates, both trade below
and both have very low price-to-earnings (P/E) ratios. That's where
the similarities end. Bank of America only exceeded forecasts
because of a reversal of previous loan write-downs and a lower-than
expected tax rate. Dig deeper into the quarterly results, and
you'll find a still-troubled bank with ongoing legal headaches.
Citigroup, on the other hand, is getting healthier, despite
my recent mea culpa
that an expectation of a big stock rebound was quite premature.
have rallied 20% since that sobering update, and the quarterly
upside was delivered through good old-fashioned business
improvements and not one-time
gimmicks. When the dust finally settles over the troubled banking
sector, investors are likely to refocus on tangible book value as a
measure of a financial sector stock's worth. Merrill Lynch pegs
that figure at $61 a share for Citigroup -- twice the current
price. It may take some time to get there, but this still looks to
be a very inexpensive stock, and Citigroup may well benefit from
the distress -- and subsequent retrenchment -- from rivals both in
the United States and in Europe.
Another theme for many of these "estimate-beaters" is that the
strong results may not last. For example:
posted solid profit margins thanks to still-strong results at it
Bell Helicopter division. But the Textron's Cessna plane division
is struggling for new customers, and quarterly results may weaken
in coming quarters.
Knight Capital (NYSE:
strongly benefited from the stock
volatility in July and August, which created wide bid/ask spreads
in its market-making business. Volatility dropped in September
and the current quarter is unlikely to deliver the same upside
Cytec Industries (NYSE:
, which makes a range of industrial paints and resins, saw robust
demand last quarter, but has already seen business slow more
recently and is hunkering down for a period of upcoming softness
by closing a key plant in Brazil.
The key for "upside surprise" plays is to find companies that can
sustain their momentum. I think I've found one of them (in addition
to Citigroup, noted above).
Noble Energy (NYSE:
This oil and gas driller showed strength throughout the
. Especially productive wells allowed Noble to produce roughly 3%
more oil and gas than analysts had anticipated, and the costs to
dig new wells also came in lower than expected. The current quarter
should be equally impressive as new wells could come online a
quarter before many analysts had expected. "It's rare that you have
the combination of production, development and exploration all
peaking at the same time for one company," note analysts at Sterne
Agee, who carry a $107
on the stock.
Noble has built an impressive slate of development projects, from
Israel to West Africa to U.S.-based shale plays and the Gulf of
Mexico. The recent quarterly results are part of an ongoing trend:
Management tends take a very conservative stance to costs and
development schedules and then typically comes in ahead of plan.
That's why the company has topped the consensus
by at least $0.12 a share in each of the last three quarters and
will probably keep doing so as new energy projects start to come
online later this quarter. Analysts at Citigroup figure a steady
cash flow per share
, from $1.47 a share in 2011 to $16.50 a share in 2012 and $18.87 a
share in 2013 puts
on the stock at $110 -- almost 25% above current levels. And that
upside comes with still-depressed natural gas price forecasts.
Risks to Consider:
A still-weak economy should lead you to closely scrutinize
recent results as well as the assumptions built into forecasts for
future quarters. It's best to avoid assuming costs can be cut much
more, so future "estimate-topping" results will likely only come
from company-specific growth drivers or a strengthening
Action to Take -->
Even with the banking and natural-gas sector experiencing
challenging environments, Citigroup and Noble Energy still managed
to deliver solid numbers. Citigroup brings significant potential
upside along with ample risk, while Noble offers decent upside with
likely limited risk.
-- David Sterman
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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