3 'Strong Buy' Stocks Heading Into Earnings

With earnings season in full swing, the results so far are looking good. Overall growth is coming in at 10 to 14%, with 46% of the S&P 500 companies having reported so far, and some 70% of those having beaten the forecasts. And on the last day of January, the S&P index was up 5% for the month.

A series of good-news events helped the markets last week. On Wednesday, Jan 27, the Federal Reserve declined to raise interest rates, and indicated that it will pursue a more cautious monetary policy. US-China trade tensions appear well on the way to easing, as a Chinese delegation met with White House officials in an ongoing effort to reach a deal in the tariff policy ‘trade war.’ The latest market boost came from Apple and Boeing, both of which beat earnings expectations. Apple’s Tim Cook even told CNBC, “There is a bit more optimism in the air in January, or certainly I feel that anyways.”

With this in mind, let’s now take a closer look at three stocks that will be releasing earnings in the first week of February. Using TipRanks, we can see what top-performing analysts are expecting going into the print.

Alphabet, Inc.

Let’s start with Alphabet (GOOGLResearch Report). The internet giant is scheduled to report Q4 2018 earnings on Monday, February 4, and the forecast is upbeat. Alphabet is expected to post an EPS of $11.12, for 6.9% year-over-year growth. The quarterly revenues are expected at $31.26 billion, a 20.8% increase from the year-ago quarter.

The strong earnings are based on the Google search engine’s unbeatable level of market penetration. In a recent industry survey of online social media and search engine use, web surfers reported using the Google site 96% of the time, and with 95% of those surveyed indicating steady or increasing use of the Google search engine in the previous six months. The high use levels give Google and its partner companies a solid foundation for building advertising revenue.

KeyBanc analyst Andy Hargreaves (Track Record & Ratings) reviewed Alphabet on Jan 29, and pointed out that the company “[R]etains compelling opportunities to continue driving strong advertising growth in Search, YouTube, and Maps, and retains significant growth opportunities in cloud, hardware, and Other Bets. This combination should support sustainable growth…” His price target of $1,430 gives GOOGL stock a 27% upside potential.

Weighing in on Jan 30, was Jefferies’ Brent Thill, the #19 ranked tech sector analyst in the TipRanks database. Thill pointed out Alphabet’s heavy cash holdings, noting that the company “in the last 10 years has added $100B to its coffers, from $16B in 2008 to $115B in Q3 of 2018.” He added, “Despite often heavy investments in many initiatives, Alphabet's net cash balance has grown massively.” Thill’s price target of $1,450 suggests a 29% upside to GOOGL.

In total, Alphabet stock has a $1,374 average price target and a 22% upside. The company holds a ‘Strong Buy’ analyst consensus, based on a unanimous 20 ‘buy’ ratings. The current share price of GOOGL is $1,118.

Lumentum Holdings, Inc.

Lumentum (LITEResearch Report) produces laser and optical fiber equipment for networking systems. The company’s ticker reflects this: LITE. With their Q2 FY2019 earnings release coming up on February 5, Lumentum is definitely in the spotlight this week.

The report is expected to show an EPS of $1.18, which while a strong positive number will represent a 29% drop from last year’s Q2. Revenues are expected to show an 11% year-over-year drop, and come in at $356.41 million.

The lowered earnings expectations are also prompting analysts to lower their price targets on the stock. Lumentum supplies 3D optical technology to Apple, and that giant’s lower sales figures are working their way down the food chain. The news isn’t all bad for LITE, however, as the supplier has other business outlets.

This factor prompted Needham analyst Quinn Bolton to point out that, aside from the Apple exposure, Lumentum’s “business looks strong with robust optical demand for ROADMs and Pumps and solid dynamics in Industrial lasers.” Bolton sets a $65 price target, giving a 30% upside to LITE shares.

Troy Jensen (Track Record & Ratings), of Piper Jaffray, also takes an optimistic view of Lumentum for the long term. Saying that the company will likely shrug off short-term weakness, Jensen points out that “Lumentum is one of the better positioned optical component suppliers and its acquisition of Oclaro strengthens the company's position and should lead to industry-leading profitability as cost synergies materialize.” Indeed, Jensen’s $59 price target suggests a 18% upside potential to the stock.

Lumentum’s analyst consensus rating is another ‘Strong Buy,’ this one based on 11 ‘buy’ reviews and 2 ‘holds.’ The average price target is $62, giving 24% upside from the current share price of $49.

Spirit Airlines, Inc.

Reporting earnings on February 5 we have Spirit Airlines (SAVEResearch Report), the ultra-low cost airline service with an excellent record for safety and on-time arrivals.

Spirit is expected to show $1.39 EPS in the Q1 2019 report, a 90% gain from the year-ago quarter. Revenues are expected at $852.24 million, a more modest 27% gain from a year ago.

The upbeat outlook for the airline is finding its way into the analyst reports. From Citigroup, Kevin Crissey (Track Record & Ratings) raised his price target to $70, and said that he “likes the setup for SAVE in 1H’19 as the company will continue to see the efficiency benefits of its pilot deal from last year.” His price target suggests an upside of 14% for SAVE.

Also boosting his price target is Michael Derchin (Track Record & Ratings), of Imperial Capital. Derchin states, “Investors are likely underestimating SAVE’s earnings and unit revenue potential considering moderate capacity growth, greater yield management capabilities, robust ancillary revenue growth, and operational improvements.” He gives a price target of $90 and an upside potential of 47% for this stock.

Overall, Spirit Airlines holds a ‘Strong Buy’ on the analyst consensus, with 9 ‘buy’ ratings and 3 ‘holds.’ SAVE shares have a 22% upside, based on an average target of $74 and a current share price of $61.

Author: Michael Marcus.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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