And so the game continues. Heading into every quarter, analysts
tend to tamp down their
earnings
forecasts, helping many companies to exceed the newly-lowered
estimates modestly. During the past few years, this has enabled
roughly 55% to 60% of companies beat the consensus estimates each
quarter. The early read on the first quarter of 2012: a hefty 80%
of companies have topped
profit
forecasts, according to S&P Capital IQ. (If it holds up, then
it will be the best showing in six years, or 24 reporting periods.)
Why such a solid start to this
earnings season
? Analyst conservatism gets some of the credit, but it's pretty
clear that the U.S.
economy
is holding up OK while many of our key trading partners wrestle
with distress.
Indeed, fully 70% of companies that have reported results thus far
have topped sales forecasts. As I cautioned
a month ago
, profit
margin
gains are likely to prove elusive, so solid sales results will be
necessary to fuel bottom-line gains.
Still, macro concerns -- mostly tied to Europe and China -- have
pulled the
market
south even as U.S. corporate profits build a head of steam. In
fact, companies that are topping forecasts have seen only a modest
initial trading gain: According to Bespoke Investment Group, the
average estimate-topping performance has yielded an average 0.8%
gain. Any company that has missed forecasts has subsequently fallen
by 4% in the next trading day.
NOW is the time to start building your watch list
With the market now in selloff mode, even recent gainers are
sliding back. This process could take a while to play out, so this
may be a better time to accumulate a list of stocks that you are
prepared to start buying, even if you choose to stay on the
sidelines at the moment.
Which brings us back to the companies topping sales and profit
forecasts right now... When the market stabilizes, investors are
likely to circle right back to them and start loading up.
Here's a list of companies that have topped profit forecasts, and
the resulting gain or loss since results were released. Each
company has a
market value
of at least $500 million and topped profit forecasts by at least
25%.
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Most of these stocks have risen a bit higher, but as you dig into
the actual earnings reports, you realize that many of these stocks
would have seen much more substantial post-earnings gains if the
broader market hadn't been so weak.
To be sure, some of these companies need to deliver more than just
a solid quarter to boost investor interest.
The New York Times Co. (NYSE:
NYT
)
, for example, has yet to deliver top-line growth: Sales are
expected to fall another 11% this year to around $2.07 billion.
Yahoo's (Nasdaq:
YHOO
)
cost-cutting may have helped the bottom-line, but this is still a
company wandering in the forest. And
Peabody Energy's (NYSE:
BTU
)
quarterly results are being overshadowed by broader coal industry
woes, though as I noted
in this piece
, the company's outlook may be brighter than many investors
suspect.
A little-noticed
turnaround
One stock stands out from this group. It remains unloved, falling
back after a recent solid quarter, yet is showing all the signs of
a turnaround. I'm talking about
AMD (NYSE:
AMD
)
, which has been slowly generating improving results after new
management took the reins last fall. I first suggested investors
check out this chip maker
last summer
, right before the market plunged.
Shares
have managed to stage a nice rebound since then, but still look
quite undervalued.
Toiling in
Intel's (Nasdaq:
INTC
)
shadow, AMD will always have to win customers by
offering
a better price. And that has often meant relatively weaker gross
margins, especially as AMD lacks the manufacturing scale that Intel
can utilize to
hammer
down unit costs. So non-GAAP gross margins of 46.0% (160 basis
points above consensus forecasts and a similar improvement from a
year ago) are notable, and management says that margins will keep
rising throughout the year, thanks to a recent renegotiation at a
key foundry relationship.
To be sure, PC sales remain weak, and AMD is only expected to boost
sales at a 4%-5% clip in 2012 to around $6.8 billion. What does
that
mean
for the
bottom line
? Analysts are all over the map. The low end of the consensus looks
for earnings of $0.50 per share, while the high end forecasts $0.90
per share.
Analysts at Citigroup digested AMD's first-quarter results and came
up with a profit forecast of $0.80 a share. They note that the
company is finally taking
market share
(albeit from a low base) in both the server and PC markets. They
figure "AMD is now righting the ship and noticeable low-hanging
fruit exists just as the cycle is turning." They see shares rising
from a current $7.50 up to their $12
price target
(a 60% gain).
Risks to Consider:
Whenever looking at companies that have topped estimates, you
must look at the broader picture to see whether it is part of a
broader trend and not the result of short-term benefits.
Action to Take -->
As I said earlier, AMD was the name that stood out to me from this
list. But that doesn't mean the other stocks on this list aren't
worthy investments, either. The fact that most of these stocks are
up modestly despite posting solid quarters tells you that they may
be the first to rebound when the market stabilizes. We may not be
there yet, but this is a great time to do further research.
[
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-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of INTC in one or more if its "real money" portfolios.