Earnings season is the most dangerous time of the year for
companies and investors alike.
The Street frequently punishes companies that fall short of
expectations, with investors quickly bailing onstocks that show
even a glimpse of weakness.
Apple Inc. (Nasdaq: AAPL)
for example. Even though the company's recent fourth-quarter
results beatanalyst estimates, because sales andmargin
year-over-year growth slumped in key areas, Apple was hit with a
10% loss just hours after the release.
It's a simple lesson, but also one that reinforces just how
important it is to invest in companies that consistently beat
expectations. Companies that consistently beatearnings expectations
are sending a big message to themarket .
At the highest level, anearnings surprise says alot about
management. It demonstrates management's ability to identify
newinvestment opportunities to drive return onequity . It also
means the company's leadership effectively manages analyst
expectations. Letting the analyst community get toobullish and
missing overly optimistic estimates is a cardinal sin for a good
It's also important to recognize that earnings surprises are
driven by earnings growth. A company with a consistent record of
beating estimates is demonstrating its ability to grow earnings in
all different stages of the economic cycle. Consistent earnings
growth also helps on the valuation front, still the single most
important factor affecting a company's share price.
As you can see, a company that consistently beats expectations
has a few things to brag about.
But when it comes tolarge caps , heavy analyst coverage makes it
hard to sneak up on the Street with anything new, even an earnings
surprise. On the other side of the spectrum, small caps have so
little analyst coverage that can it can lead to extreme
That's why I look to mid-cap stocks when I want to find
companies that consistently beat earnings. Mid-cap stocksoffer a
great blend of growth, stability and the perfect amount of analyst
coverage to set the foundation for an earnings surprise thatwill
I built a list of seven mid-cap stocks that
consistently crush earnings. In fact, each one of the stocks listed
has had an average earnings surprise of more than 50% in the last
Of the seven, two companies stand out:
Hillshire Brands (
, because it operates in the bullish food and agriculture industry
Atmos Energy (
because of itsleverage to natural gas.
1. Hillshire Brands Co.
Hillshire Brands is a food manufacturer with an impressive
portfolio of brands that includes Jimmy Dean, Ball Park and Sara
Lee. With the food and agriculture stocks jumping higher in the
past few years, Hillshire Brands has been on the move, up a
market-beating 33%. These gains have been driven by solid earnings
growth, withanalysts looking for 17% earnings growth in the fourth
quarter of 2012 and another 6% in 2013.
This has lifted Hillshire Brands to an average earnings surprise
of 59% in the last nine quarters. The company also carries a
soliddividend yield of 1.7%, which is almost on par with the
10-YearTreasury note 's 1.9%yield .
2. Atmos Energy
This utility company stores and distributes natural gas in the
United States. This places the company in an excellent position
tocapitalize on the secular growth trend in the consumption of
natural gas. Atmos is up 17% in the past year, almost directly in
line with the S&P 500. As a utility, thisstock offers high
barriers to entry, consistent growth and a solid dividend yield of
3.5%. But in spite of its status as a utility, growing demand for
natural gas has lifted Atmos to an average earnings surprise of 56%
in the last nine quarters.
Risks to Consider:
Actual earnings are important but forwardguidance is as well.
Companies that beat earnings expectations can still trade lower if
guidance comes in below expectations.
Action to Take -->
These seven mid-cap sotcks have averaged more than a 50% earnings
surprise in the last nine quarters. And with Hillshire benefitting
from the bullish trend in food and agriculture, and Atmos in
position to gain on the natural gas boom, these are two mid-cap
stocks with strong histories of earnings surprises to keep an eye
on this earnings season.
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