Earnings season
can be a white-knuckle affair. You wait on pins and needles to see
if your stocks deliver solid results and a robust forward outlook.
So when results roll in and they are disappointing on most counts,
it's quite tempting to just dump the stock and move on.
Yet for many investors, a weak quarter spells opportunity.
By digging past the headlines and deciphering what lies ahead, as
spelled out by management plans, these tough periods can simply
present buying opportunities -- assuming the stage is set for
better results in the quarters to come.
I
call
these the "bad quarter, good outlook" stocks.
The subsequent quarter may also be challenging for these companies,
but if you are willing to hold a position for several quarters,
then your patience may be rewarded -- handsomely.
A clear example can be seen with
Cree Inc. (Nasdaq:
CREE
)
, which is a member of my
$100,000 Real-Money Portfolio
. The maker of LED lighting systems missed analysts' fiscal
second-quarter sales and
profit
forecasts. And though
shares
opened down nearly $1 on the morning of Jan.18 to below $23,
they've risen nearly 35% in the ensuing six weeks. Why? It's
because investors sense that Cree will eventually deliver much
improved results -- perhaps not in the current quarter, but soon
enough.
Here are three other companies that recently delivered
disappointing results, but should be very appealing to long-term
investors.
1. Avis Budget (NYSE:
CAR
)
The world's second-largest car rental agency (after
Hertz (NYSE:
HTZ
)
) lost $0.14 a share in the December quarter. Analysts had been
anticipating a $0.06 a share profit. Part of the loss can be
attributed to costs associated with a September 2011 purchase of
Avis Europe, which had been divested more than a decade ago.
It's actually that European
acquisition
that spells upside for Avis Budget in the quarters to come.
Management has identified a range of cost-cutting opportunities in
what has been a fairly bloated European operation. In addition,
combining on all of the company's regional divisions onto one
platform should
yield
solid cross-selling opportunities: Corporate customers tended to
give most of their business to Hertz simply because it was easier
to negotiate world-wide terms with just one vendor. Avis'
management team will be pushing hard to boost the company's
presence among corporate accounts in the quarters ahead.
Analysts have yet to incorporate any of the cost cuts or potential
revenue gains as Avis Europe is integrated. The company's
earnings per share (
EPS
)
is expected to be flat in 2012 at about $1.60 a share (compared
with $1.65 a share in 2011), with
EPS
rising to just $1.70 in share in 2013. Yet the revamped Avis looks
capable of earning around $2 or $2.25 a share once the planned move
take place.
Shares had risen up above $15 in early February on hopes of a
strong quarter. They're now back below $13, or around six times my
projected 2013
earnings
, as the bar has been re-set.
2. Digital Generation (Nasdaq:
DGIT
)
This provider of broadcast and online media placement programs has
missed profit forecasts for three straight quarters. Shares have
fallen from $37 during last spring to a recent $10.50. Yet a large
part of the earnings weakness stems from heavy investments in the
company's key platforms.
Digital Generation, formerly known as DG Fast Channel, helps
disseminate advertising and video content across broadcast
networks. Although DG was also investing in a separate
Internet-focused video platform, the company realized that the line
between TV programming and Internet programming was quickly
blurring as consumers increasingly sought to stream their favorite
shows, movies and video clips. DG has been moving to quickly
integrate its two business segments, creating a
one-stop shop
for advertisers and content producers.
To reflect those investments, management anticipates per share
profits slumping about 25% this year to $0.67 before rebounding to
$0.90 in 2013. Analysts have quickly moved to the sidelines, with
several lowering their rating to "neutral." That's OK. They'll
likely look to upgrade shares again AFTER the company is once again
on a healthy growth path. Long-term focused investors should be
researching this bounce-back candidate before the analysts come
back around.
3. Calgon Carbon (NYSE:
CCC
)
This maker of carbon filters used in air and water purification
systems warned in mid-February that a series of one-time charges
would dampen fourth-quarter profits. Analysts expected the company
to earn $0.19 a share in the quarter prior to that warning, and the
company ended up earning roughly half as much.
Yet Calgon Carbon is pursuing a range of initiatives that could
sharply boost sales and profits in the years to come. So management
has decided to boost spending now, dampening near-term profits.
Those growth initiatives include:
• Increasingly stringent mercury emissions at coal-fired power
plants, many of which will need the company's scrubber technology.
• New marine regulations that restrict ships from dumping dirty
ballast water. Calgon Carbon's Hyde Marine division makes filters
that have proven quite effective in scrubbing water impurities out
of these discharges.
Analysts at Brean Murray have a straightforward explanation as to
why investors should overlook recent weak results: "If we look at
CCC's list of negative impacts in 4Q11, they are, in our view,
indicative of the typical growing pains we would expect any company
of CCC's size to experience that is actively expanding across
multiple major platforms, each containing a unique set of
opportunities."
Shares of Calgon Carbon have been stuck in a tight $16-$18 range
for most of the past four years, though Brean Murray sees an upside
move to $24 once the company's current investments have paid off.
Risks to Consider:
A weak quarter can often beget another weak one, so it's best
to stay focused on the long-term potential for these stocks.
Action to Take -->
Remember that the strongest investment gains come from stocks that
are unloved by most, usually due to recent operating trends, but
are capable of stronger trends in the quarters to come. These
companies surely fit that description.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of CREE in one or more if its "real money" portfolios.
