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3 Earnings Stocks to Trade for Gains - 13368 views
MINNEAPOLIS (Stockpickr) -- Investors got an early start on earnings season. Putting the nonsense of pure speculation behind us, the market moved excitedly higher last week in anticipation of a strong earnings season. With valuations ultimately determined by profits, the uptick is not surprising given profit growth for many publicly traded stocks.
Within the strong rally, those companies reporting results last week enjoyed solid gains or disastrous results depending on the news being released. In the winners bracket, we rightly identified Darden Restaurants (DRI) and Apollo Group (APOL). Both stocks moved up solidly in the trading day after their respective reports.
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On the downside, we also correctly predicted weakness in Family Dollar (FDO) and the earnings disaster that was KB Home (KBH). Family Dollar had been higher on takeover speculation, but actual earnings were not enough to support what was becoming a lofty valuation. KB Home posted a bigger loss as the homebuilding market continues to sputter.
Other names in the news with big gains or losses were Christopher & Banks (CBK). The clothing retailer posted a surprise profit and shares jumped 13% on Friday. Eastman Kodak (EK) collapsed thanks to a ruling against it by the ITC. Shares of Eastman Kodak lost 14% of their value on the news.
Looking forward, the holiday-shortened week offers a relatively small number of companies releasing results. Here's how to trade three of those stocks.
Helen of Troy
Consumer brand and appliance company Helen of Troy (HELE) reports results on Thursday before the market opens. Over the last four quarters, the company has beaten average Wall Street estimates by healthy margins. Despite that performance, analyst estimates for the quarter ended May 31 have not budged from where they were 90 days ago.
During the same 90-day period, shares of Helen of Troy have gained about 20%. This is one instance in which the market has rewarded operating performance. Despite the move, shares of Helen of Troy are inexpensive.
Wall Street expects the company to make $3.42 per share in the current year ending Feb. 28, 2012, and $3.77 per share in the following year. Investors can buy that 10% growth for 10 times earnings using the current price of $34.99 per share. If the company beats expectations, shares will have to improve just to keep that low valuation intact.
More likely is that the market will reward the stock with further gains should Helen of Troy beat expectations with this next report.
With Nascar running an event at the company's Daytona race track over the past weekend weekend, it is fitting that International Speedway (ISCA) reports earnings results for the quarter ended May 31 on Thursday before the market opens. I happened to watch some of the race on Saturday night and noticed lots of empty seats at the track.
Of course, that observation means nothing with respect to the performance of the company, but it does confirm what has been general weakness within the sport since the recession first took hold. Over the past four quarters, International Speedway has had mixed results. In two of the four quarters, the company missed analyst expectations.
But the company has beaten, if only by a small margin, estimates in the last two quarters. For the current period, the average Wall Street estimate is for a profit of 27 cents per share. For the full year ending November 30, the average estimate is for a profit of $1.70 per share.
Clearly the company is making money, but its expected profit growth rate of 12% from the current year to the next does not justify a premium valuation. Shares trade for 18 times 2011 estimated earnings. On Friday, the company received a boost in the form of a brokerage upgrade from Wall Street firm Raymond James.
Shares had been trading down some 16% since early April before last week’s rally took away some of that sting. Even so, the valuation suggests that the discount was probably in line given the modest growth expectations and performance over the last year.
We shall see if the company can deliver the goods when it releases results this week.
International Speedway is also featured on a recent list of Earnings Short-Squeeze Plays.
Bears in the market are concerned about the negative impact of higher commodity prices on corporate profits. Thus far, corporations have been fairly silent on the issue, but here and there some companies are noting that higher input prices are indeed taking a bite out of profits. One such company is WD-40 (WDFC), which is set to release earnings results after the market closes on Thursday.
Two weeks ago, the company announced that it was lowering profit and revenue guidance for the year ending Aug. 30. The midpoint of its new profit range is $2.10 per share, down from prior guidance of $2.29 per share. WD-40 shares were down more than 7% in the market after the news was released at $38.06 per share but recovered to close at $39.49 per share.
Thanks to a market rally since the updated guidance was released, WD-40 is back above $40 per share. That is only slightly lower than the $41.23 close just prior to the reduction in guidance news being released.
Analysts lowered fiscal-year 2012 earnings estimates for the company to $2.39 per share. If WD-40 hits the midpoint of its guidance, the new estimate would represent an earnings jump of 14%. At current prices WD-40 trades for just under 17 times 2012 Wall Street average estimates.
That is a bit pricey given the expected slippage in profits in the current year. That said, commodity prices have been moderating of late with many suggesting that inflationary pressures are subsiding. It is certainly reasonable to think that WD-40 would benefit from lower prices, but I would be cautious.
My preference would be to own this stock at a lower price. Investors may get that discount after the company reports results this week.
To see these stocks in action, check out the 3 Earnings Trades portfolio.
-- Written by Jamie Dlugosch in Minneapolis.
At the time of publication, author had no positions in stocks mentioned.
Jamie Dlugosch is a founder and contributor to MainStreet Investor and MainStreet Accredited Investor. Formerly, he was president and CEO of Al Frank Asset Management. He has contributed editorially to The Rational Investor, The Prudent Speculator, Penny Stock Winners and InvestorPlace Media.