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5 Earnings Stocks to Trade for Gains - 8912 views
MINNEAPOLIS (Stockpickr) -- Sellers in this market sure are persistent. Stocks cannot get any traction. One worry subsides, and another takes its place. With the absence of any real news, the bears are winning the speculation battle.
The stock market finished lower last week, ending a short one-week winning streak. The losses were minimal, but the psychological damage may be worse. It would appear that nobody wants to buy stocks in the current environment. About the only positive is that the S&P 500 stayed above important technical levels.
The tone may have been cautious overall, but
stocks releasing earnings last week fared well. Most encouraging were results from FedEx (FDX). The overnight shipping company beat estimates and provided guidance that was higher than expected. Despite an economic soft patch and higher oil prices, FedEx's profits are growing impressively.
FedEx shares moved higher on the news. Homebuilder Lennar (LEN) posted another profitable quarter that exceeded estimates. Its shares were higher as a result of the news. Also posting good numbers were Carnival Cruise (CCL) and Bed Bath & Beyond (BBBY).
From an earnings perspective, things appear to be moving full speed ahead. For anyone paying attention, corporate profit strength in the second quarter is likely to get us out of these doldrums.
Here's my take on five companies reporting results next week.
There is lots of action in Family Dollar (FDO), one of TheStreet Ratings' top-rated multiline retail stocks. Many of the biggest hedge funds, including Bill Ackman’s Pershing Square, own shares. A failed takeover of the company has not squashed rumors that another buyer will emerge. Why the attraction?
With this challenging economy, Federal Dollar is uniquely positioned to grow. Consumer budgets remain tight and attracted to discount retail. Since the end of April, shares of Family Dollar are holding up relative to other stocks in the market. With stocks down close to 10% during that time, Family Dollar is only down about 4%.
When the company reports earnings on Wednesday, we’ll see how Family Dollar is performing on an operating basis. The company is expected to grow profits by 16% from the current fiscal year ending Aug. 31 to the next. The company has reported essentially in line over the last year.
With shares higher thanks to takeover speculation, it will take really strong results to send shares higher. In my opinion, the outcome here is another ho-hum in-line report. Shares will likely trade lower as a result.
The second quarter included some of the craziest spring weather in some time. We have had a high number of deadly storms, cooler weather in the Midwest, hotter weather in the southwest, and flooding across the breadbasket so essential to the agricultural industry. Will the weather result in weaker results for seed and fertilizer company Monsanto (MON)?
The company reports results for the quarter ended May 31 on Wednesday. The average Wall Street estimate is calling for $1.11 per share. That number has stayed the same for the entirety of the last 90 days. In other words, Wall Street is assuming no blips in results due to the weather. This is not surprising given that the company has a strong track record of meeting estimates within a penny or two over the last year.
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This quarter may be different given the crosscurrents in the economy and with the wacky weather. How will the stock react to a poor report? Shares are down only 3% since the end of April. As a result of that strength, shares of Monsanto are a bit pricey. The average estimate for profit growth from this quarter to the next is 19%. Shares now trade for 23 times current estimates.
I’d play Monsanto on the short side. A miss could send shares tumbling.
Conditions have appeared to stabilize in the for-profit education industry. Troubled by enrollment and student loan issues, shares in the sector have been decimated over the last two plus years. Apollo Group (APOL) is down 53% from its peak reached in early 2009 but up 6% so far in 2011.
The company reports results for the quarter ended May 31 on Thursday. In the last two reporting periods, Apollo beat Wall Street consensus estimates by a wide margin. Analysts are looking for the company to make $1.34 per share for the May ending quarter. That estimate is slightly less than the $1.38 that was expected 90 days ago.
The trouble for investors is the full-year picture. The average estimate for the current fiscal year ending Aug. 31 is $4.65 per share but only $3.16 per share in the following year. Shares trade for 9 times current-year estimates.
Apollo tends to do well when the economy is weak. Will the soft patch in the second quarter translate to stronger results for Apollo? Certainly the last two quarters of outperformance suggest a beat is in order. I would trade expecting as much.
Darden Restaurants (DRI), one of the highest-yielding leisure stocks, is one of the few stocks that have gained value since the end of April. Shares of the casual dining company, whose brands include Olive Garden, Red Lobster and Capital Grille, have gained 3%. That compares very favorably to a 6% loss in the S&P 500.
Despite a weaker-than-hoped-for economy, casual dining has been a consistent performer in the last year. Low prices and convenience allow consumers to escape the monotony of home cooking. Companies in the space are growing at a double digit clip resulting in valuations that are attractive for investors.
A look at the last year shows Darden performing very well against average Wall Street estimates. The company has met or beat estimates in the last three quarters, including a 3 cent per-share beat in the most-recent quarter ended Feb. 28. On Thursday, Darden reports results for the quarter ended May 31.
The current estimate is for the company to make $1 per share in the period. For the full year ending on the same date, the estimate is for Darden to show a profit of $3.41. The expectation for the next year is for profits to grow by 12% to $3.81 per share. At current prices, Darden trades for 14 times current year estimates.
Investors can expect another steady report from Darden on Thursday. The market should reward the stock with a solid 3% to 4% gain for such results.
It has been a tough year for homebuilder KB Home (KBH). Shares have sunk since the start of the year, with the stock down 11% year to date. At the end of last year, investors had bid up shares on hope that 2011 would be the year that homebuilders turned it around in earnest.
Call it another false start -- one of many for stocks in the group. The move lower should be no surprise. From a valuation standpoint homebuilder stocks had become expensive. Earnings were simply not strong enough to sustain lofty values.
KB Home greatly disappointed investors when it reported results for the period ended Feb. 28, posting a big loss of $1.49 per share. The average Wall Street estimate was for a loss of 27 cents per share. The result pretty much locked in a loss for the full fiscal year, ending November 2011. Perhaps 2012 will be the year profits return.
Currently Wall Street consensus is for a profit of 37 cents per share for fiscal-year 2012. Trading for $12 per share today, KB is valued at 32 times 2012 earnings. On a book value basis, KB Home trades for a hefty 1.75 times book value.
Despite losses in share value this year, KB Home is still expensive as it heads into its next earnings report, to be released on Wednesday. With mixed signals coming from the sector, results are likely to be volatile. A miss here could result in the stock shedding significant value. I would trade on the short side expecting weak results.
-- Written by Jamie Dlugosch in Minneapolis.
To see these stocks in action, check out the 5 Earnings Trades portfolio.
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.