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These 'Beat and Raise' Stocks Have Major Upside Ahead

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To paraphrase Isaac Newton's First Law of Motion, "a company that exceeds earnings forecasts tends to keep exceeding earnings forecasts." That's because Wall Street analysts tend to only incrementally adjust their forecasts in light of new information. So these companies keep on delivering better-than-expected results, and investors can profit by positioning their investments ahead of the next quarterly upside.

The key to finding such stocks: look for those companies that manage to not only exceed quarterly forecasts, but raise forward guidance as well. These "beat and raise" stocks are often excellent momentum investments.

Of course, momentum investing has a clear drawback. Investors may be catching such stocks at a time when they are already sporting lush valuations. Growth is nice, but not growth-at-any-price.

In that light, I've been reviewing Q4 reports, looking for companies that exceeded profit forecasts by at least 15%. I ignored any stocks that didn't receive a boost to their 2015 and 2016 earnings per share forecasts. Lastly, I decided to only focus on those stocks that trade for less than 18 times projected 2016 profits. Here are a dozen stocks that fit those criteria.

Company Q4 Beat (%) 2015 EPS 2016 EPS 2016 P/E Market Cap ($ Mill)
Ryland Group 31 $3.55 $4.11 10.6 $1,999
CSG Systems Int'l 13 $2.26 $2.57 11.5 $1,013
Iconix Brand Group 16 $2.76 $3.06 11.5 $1,694
Group 1 Automotive 25 $6.59 $7.29 11.7 $2,072
TrueBlue 16 $1.57 $1.83 11.7 $909
Cliffs Natural Resources 614 $.11 $.47 13.2 $961
Michael's Cos 19 $1.45 $1.71 16.0 $5,561
Werner Enterprises 18 $1.59 $1.78 16.4 $2,098
Cognizant Technology 15 $2.93 $3.40 16.9 $34,973
Rudolph Tech 117 $.58 $.72 16.9 $401
Exar Corp 83 $.25 $.61 17.5 $505
Silicon Labs 21 $2.25 $2.66 17.9 $2,002

Source:ThomsonReuters

Among this group, three stocks stood out as clear bargains.

Ryland Group, Inc. (NYSE: RYL )

There is a lot of cross-currents impacting the housing market as we head toward the spring selling season. As my colleague Ian Floyd pointed out, the all-important Texas housing market may be about to take a tumble. And as I subsequently noted, housing markets may benefit from lower oil prices -- a trend that could start to heat up in 2016.

Though I cited MDC Holdings (NYSE: MDC ) and Beazer Homes (NYSE: BZH ) as solid value plays (the latter has seen hefty recent insider buying as well), I should note that the Ryland Group delivered the most impressive quarterly results and outlook of any of the homebuilders. The company is boosting revenues at a low-teens pace, and profits at a nearly 20% clip, thanks to operating leverage. (Speaking to Ian's concern, Texas is one of 13 states in which Ryland operates, but the only one with exposure to oil and gas markets).

Ryland, like many homebuilders, still thinks we're in the early innings of a housing market rebound. As CEO Larry Nicholson told investors on the quarterly conference call, "favorable demographics, an improving economy and better employment picture are key drivers of household formations that should lead to an increase in demand in new homes." Another unmentioned tailwind: current levels of home ownership are at the lowest level since 1994, according to the National Association of Realtors.

Iconix Brand Group, Inc. (Nasdaq: ICON )

This remains one of my favorite ways to play retail spending. As I noted roughly 18 months ago, this growth-through-acquisitions business model has been generating robust free cash flow, which has risen for six straight years. That has fueled a long string of share buybacks.

Iconix, which licenses many apparel brands, has exceeded profit forecasts by at least 10% for three-straight quarters. But its shares have pulled back since peaking last summer, in part due to a copyright infringement suit from Converse sneakers that was filed in December 2014.

Looking for a catalyst in 2015? Iconix has roughly 100 licenses pertaining to Charlie Brown and the Peanuts gang. A Peanuts movie is slated for release in November 2015, which should generate millions in licensing revenue for the company.

Werner Enterprises, Inc. (Nasdaq: WERN )

This trucking firm delivered better-than-expected Q4 results thanks to a series of price increases put in place in 2014. And looking into 2015, results should continue to be stellar for a pair of simple reasons:

First, diesel prices in 2015 will be a lot lower than they were a year ago. In January 2015, Werner saw a $1.38 a gallon drop in its diesel expenses, compared to January 2014.

Second, the slowly strengthening consumer economy should portend higher demand for trucking services.

Management has also taken another key step to improving the long-term appeal of this business model. Over the past 18 months, Werner has heavily invested in a new truck fleet. That should sharply reduce unplanned repair costs and also boost the fuel mileage of the fleet.

A younger and more advanced fleet of trucks may help Werner with its biggest challenge: driver recruitment. A current shortage of drivers is bound to get worse as older truckers retire in large numbers in coming years. Werner's fleet investments are becoming a selling point as the company recruits younger drivers to commit to a life on the road.

Risks To Consider: These companies, along with many others, are still benefiting from a benign wage environment. Yet a firmer economy should set the stage for more robust wage gains, which may make it harder for such companies to keep delivering profits well ahead of consensus forecasts.

Action To Take --> These three companies didn't benefit from one-time gains to deliver solid results and outlooks. They all are seeing solid business trends and all trade at reasonable valuations. That growth-at-a-reasonable-price (GARP) set-up means that these 'beat and raise' stocks hold great appeal.

As I mentioned above, momentum is a good indicator of future performance.In fact , academic studies have shown that momentum is one of the only indicators that has consistently outperformed the market. In fact, two of my colleagues have been quietly testing the Maximum Profit system, which is making a small group of investors a lot of money. It flags exactly which stocks are about to jump double, even triple digits in the coming days, weeks and months. And it recently tagged a few more stocks that could do the same. After nearly two years of beta-testing they are finally revealing this system. To learn more, click here .

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