There is nothing more important to astock thanearnings . That
makesearnings season the most important time of theyear for the
The companies that miss expectationswill be punished while
those that deliver big surprises will be rewarded. But with
theeconomy showing signs of weakness in the past month,analysts
aren't expecting a blowout earnings season.
Earnings in the private sector have been trending higher for
years, aggressively rebounding out of the financial crisis in
2009. But four years down the line, earnings growth is at the top
of a multi-year cycle. Companies have cut all the fat they can
cut. Earnings growth needs to come fromsales growth, and that has
become increasingly difficult with weakness inGDP (gross domestic
That's already played out with two bellwethers, with
Federal Express (
Oracle Corp. (Nasdaq: ORCL)
both falling short of estimates.
But there is anupside to these tempered expectations. With
early results mixed and analysts' expectations lowered, it's
going to be easier to impress the Street with a big surprise.
Companies that deliver big earnings surprises will be
According to research by financialeconomists , the
post-earnings drift is the tendency for a stock's
cumulativeabnormal return to drift in the direction of anearnings
surprise for several weeks, and sometimes months, following
anearnings announcement .
That means an earnings surprise is twice as valuable: a sharp
jump in the short run and a tendency to drift higher in the weeks
and months to come. Companies that deliver earnings surprises are
good for investors.
The sixstocks listed below have seen the largest upward
revisions in estimates in the S&P 500 going into
first-quarter earnings season. That makes them great candidates
for big earnings surprises. These are the kind of biggains my
colleague Elliott Gue features in his
Top 10 Stocks
From the list, I have chosen to highlight
Netflix Inc. (Nasdaq: NFLX)
because of its incredible upward momentum and
Boeing Corp. (
because of its valuation anddividend .
This may seem like a crazy pick considering Netflix is up a
market-crushing 74% on the year. But Netflix has been making big
adjustments to itsbusiness model , adjustments that many
investors are confident will produce big results. That sentiment
is being driven by Netflix's entry into the more lucrative,
higher-margin content business, inking an exclusive deal with
Disney and its subsidiaries and producing original
This reversal has already had a stunning effect on earnings
projections. Ninety days ago, analysts were calling for 2013
earnings of 44 cents per share. Today, they are projecting
earnings of $1.19. Their estimate for next year is even
morebullish , pegged at $2.71, another 127% increase in earnings.
Netflix is still expensive at this level, trading with a forward
price-to-earnings (P/E ) ratio of 145. But this stock has clear
It's very rare to see estimates for a large company like Boeing
fluctuate 23% in 90 days, but that's exactly what has happened to
the aerospace giant's 2013 estimate in the past three months,
jumping from $5.20 to $6.37. Those upward revisions are being
driven by a number of Boeing's initiatives, particularly the
Dreamliner. The Dreamliner entered themarket years late and
recently endured a damaging battery recall, but investors remain
confident the airliner will be a big moneymaker for Boeing.
Analysts are looking for earnings growth of 14% in 2014 and a
five-year growth rate of 11%. Boeing is up 15% on the year, but
with a forward P/E ratio of 14 -- which is well below its 10-year
average of 18 and in line with the S&P 500 -- itsshares don't
lookovervalued . And with adividend yield of 2.3%, Boeing is a
Risks to Consider:
Although valuation still looks good, some of those higher
expectations on rising estimates could already be priced into
Action to Take -->
These are the seven stocks with the largest upward revisions in
estimates going into first-quarter earnings. That is a very
bullish signal, given analysts aren't overly optimistic and some
early results have been disappointing, making these stocks great
candidates to deliver big earning surprises. From the group, my
two top picks are Netflix because of its incredible upward
momentum and Boeing because of its valuation and dividend.
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