The stock
market
is increasingly looking like a boxing match. In one corner, you
have a global bruiser named Greece looking to send stocks down to
new lows. In the other corner, you have
earnings season
, which has been generally -- and surprisingly -- positive. In
fact, quarterly results have been so encouraging, two-thirds of the
350 companies in the S&P 500 that have reported results thus
far have topped estimates, translating into an average 6% upside
surprise.
The
earnings
theme helped propel the market higher in October, but events in
Europe have put a new scare in the market in early November. At
this point, however, it's best to tune out the noise and focus on
the company-specific positives. This strategy paid off handsomely
for those willing to brave the challenges of August and September,
and it will likely pay off again for the patient investor.
The charm of earnings season is that it always presents new
investment opportunities. So to in order to identify where
investors should be focusing now, I've dug up a group of companies
that are hitting the proverbial "hide off the ball." Each of the
companies in the table below topped (calendar) third-quarter
consensus
profit
forecasts by at least 30%. To bring the list down to a manageable
size, I focused on companies with a
market value
of at least $400 million and that are trading for less than 15
times projected 2012 forecasts (which were calculated prior to the
recent earnings beat).
This current earnings season highlights the risk of shorting
stocks. Chip maker
AMD (NYSE:
AMD
)
and electronics retailer
HHGregg (NYSE:
HGG
)
were heavily shorted (as of Oct. 14), and both delivered upside
surprises.
Shares
of AMD rose nearly 10% last Friday, Oct. 28, while HHGregg shot up
a hefty 20% when results were released on Nov. 2. Short-covering
undoubtedly fueled part of these gains.
Coinstar (Nasdaq:
CSTR
)
has been another heavily-shorted name (the short position accounts
for nine days of trading
volume
) that also delivered a painful blow to short sellers. They should
have seen it coming. As
I noted a few months ago
, price increases instituted by
Netflix (Nasdaq:
NFLX
)
were likely to help Coinstar gain new customers. The stock
ultimately rose 26% between my early August recommendation and late
October, but it has fallen sharply in the last few trading
sessions, and again looks like a bargain
Although Coinstar's name reflects its legacy coin-counting machine
business, investors are really focusing on its DVD business. The
company's low-price strategy (movies cost $1.20 per day), coupled
with a very large retail footprint, helped the DVD segment post
$390 million in sales in the third quarter, up from $305 million a
year earlier. This figure should hit $500 million by the fourth
quarter of 2012, according to analysts at DA Davidson.
Yet the stock has traded down since quarterly results were
released, due to concerns that management still hasn't laid out a
strategy to enter the video-streaming market, preparing for the day
when physical DVDs go the way of VHS tapes. But it's not clear what
the hurry is. The market is not going to shift abruptly and
Coinstar isn't missing the boat, especially as movie studios still
restrict the number of titles that can be streamed. On the
conferencecall with analysts, management noted an announcement
regarding streaming services would be forthcoming soon, as the
topic remains a "top priority." Meanwhile, after the recent
pullback, shares trade for just 11 times DA Davidson's projected
2012 earnings-per-share (
EPS
) forecast of $4.05. With continued defections from Netflix helping
Coinstar to maintain momentum, this looks like a bargain price.
Evercore Partners (NYSE:
EVR
)
A low-growth
economy
can create the perfect backdrop for mergers and acquisitions
(M&A), as cash-rich companies buy their way into top-line
expansion. You can already see the rising tide of deals in Evercore
Partners' third-quarter results. The advisory firm blew past
estimates with quarterly revenue of $138 million being nearly 40%
ahead of forecasts, thus triggering a 35% upside surprise on the
bottom line
.
With the exception of a slump in 2008, Evercore has been boosting
sales at a robust clip during the past six years. Annual revenue
topped $100 million for the first time in 2005 and is likely to top
$500 million this year. "The consistent growth owes to the broad
diversification
, global hiring, and deepening sector strengths that EVR has
developed in recent years," note analysts at Goldman Sachs. And
they see continued robust growth in 2012 as well, after Evercore
snagged a series of high-profile bankers from rivals recently.
Evercore made a move earlier this year to boost its advisory role
in the energy sector, which is seeing a high level of deal-making.
"The (Houston-based) Energy office is already starting to pay
significant dividends," notes Merrill Lynch, citing the firm's new
role in the recently-proposed
merger
between
Kinder Morgan Energy Partners (NYSE:
KMB
)
and
El Paso (NYSE:
EP
)
. Merrill sees shares rising from a recent $27 to $37, adding that
the company is "the fastest-growing independent advisory firm in
the world with demonstrated ability to take
market share
in recent quarters."
Risks to Consider:
All of these companies are delivering robust results in a so-so
economy. But if the economic headwinds grow stronger in 2012, then
further upside performance is a lot less likely to
materialize.
Action to Take -->
Success often begets success, especially as robust quarterly
results start to become a sustainable trend. Coinstar and Evercore
Partners are currently increasing market share, while taking action
to boost shares further in coming quarters. Equally important,
neither stock looks especially expensive, since they both trade for
less than 14 times projected 2012 profits. Given this upward trend,
I don't think either of these stocks will remain low for too
long.
-- David Sterman
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.