Fourth-quarterearnings season is almost over and the results
have been pretty underwhelming.
Out of the 342 S&P 500 companies that have reported so far,
representing 78% of theindex 's totalmarket cap,earnings are up a
meager 2.8% from the same period in 2011. Of these companies, just
67% have beaten earnings estimates, logging a medianearnings
surprise of 3.3%. Totalrevenue hasn't looked much better either, up
just 2.7% from the year-ago period with only 64% of companies
coming in ahead of expectations.
Those less-than-remarkable results have been driven by a number
of disappointing performances from headlines companies.
Apple (Nasdaq: AAPL)
fell 10% after showing signs of slower revenue growth andmargin
General Motors (
was also under pressure after posting results that fell short of
With fourth-quarter results showcasing how many companies from
different sectors are struggling with slow economic growth, the
companies that actually beat expectations are generating alot of
attention. But even though a big surprise is great in its own
right, which is usually good for a nice pop inshares , the real
effect of an earnings surprise is upward revisions in earnings
Upward revisions in estimates can have a powerful long-term
effect on shares as large mutual and hedge-fund managers begin
allocating capital into companies, demonstrating high levels of
confidence in them despite the a slow-growtheconomy . Individual
investors are an important part of this process as well, providing
additional tailwinds by shifting intostocks that are getting the
most attention and highest marks from the brokerage andanalyst
That's why companies that saw the biggest upward revision in
estimates during a very slow fourth-quarter earnings season are in
position to see big capital inflows in the next few months, a
factor that should have a powerful effect on shares.
Here is a list of nine stocks from the S&P 500 that have
seen the biggest upward revisions in estimates after reporting
fourth-quarter results. Some of them have already seen big gains,
but with the trend still well in play, they are in position to
continue moving higher as institutional and individual investors
search for high-growth companies.
From the list I have chosen to highlight
Netflix Inc. (Nasdaq: NFLX)
because of its incredible upward momentum and
DR Horton Inc. (
because of itsleverage against the housing recovery.
This is an incredible example of what can happen to astock that
sneaks up on the market with better-than-expected results and then
sees big upward revisions in estimates. As you can see in the chart
below, shares moved nearly vertically in late January, after
reporting earnings that came in more than 200% ahead of
That led to sharp upward revision in the 2013 earnings
estimates, more than doubling from 44 cents a share to $1.01 a
share. The full-year 2014 estimate also surged, almost doubling
after from $1.30 a share to $2.47, a share -- abullish 144%
earnings growth projection. Netflix isn't exactly a nice value at
these levels, trading with a forward price-to-earnings (P/E ) ratio
of 185, but there are few stocks in the market with more momentum.
Take a look at the incredible gain below.
DR Horton Inc.
The housing recovery is in full swing, with 2012 showing the first
annual increase in home prices since the market peaked in 2006. And
DR Horton has been in position tocapitalize on this growth. That
showed up in the homebuilder's strong fourth-quarter results from
late January, posting earnings of 20 cents a share that were 43%
ahead of expectations. This alsoput a nice bid into this
year'searnings estimate , jumping 8% to 95 cents a share.
DR Horton currently trades at 25 timesforward earnings , a
premium to its 10-year average of eight. But withanalysts calling
for an annual growth rate of 22% in the next five years, the
long-term outlook for this homebuilder is definitely bullish.
Risks to Consider:
Shares frequently jump right after an earnings surprise and
upward revision as first responders make quick trades, neutralizing
a portion of a stock'supside potential.
Action to Take -->
Estimates and actual earnings are the most important factors
affecting the price of a company's stock. These nine companies
delivered big earnings surprises that sent full-year estimates
skyrocketing. Some have already seen big gains, but as long-term
investors continue to shift into companies with strong earnings
growth, shares are in position to continue gaining, particularly
Netflix and DR Horton.