Stock Quotes in this Article: ARG, DD, FLR, LMT, NSC, TXT

MINNEAPOLIS (Stockpickr) -- We are seeing stocks move smartly higher this week thanks to an easing of fears regarding Greece and the eurozone. While default remains on the table, an unexpected and disorganized collapse is less likely given the support of France and Germany. Thursday marked the fourth straight day of gains, and stocks are on the rise again today in early trading.

The market hates surprises. So even though the situation in the eurozone remains more or less the same, investors cheered the semblance of a plan to deal with things in a stable manner. The action this week puts economic concerns on the back burner. Nothing in the data released this week suggests that we are out of the woods with respect to a double-dip recession.

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    For anyone interested in fundamentals, there are cracks beginning to appear in the form of reduced earnings estimates for the S&P 500. On Monday, Barclays and Wells Fargo cut their forecasts for the index, citing economic uncertainty; a Wells Fargo analyst reduced her year-end price target on the index by 10% and aggregate earnings for 2012 by 5%.

    The winds of slower growth have been blowing for some time. It is only now that we face a reckoning with respect to the impact on earnings performance.

    Thus far, earnings have been on a roll. What is unclear is how things will transpire in 2012. One of the reasons stocks have declined since the middle of July is an expectation of smaller profits. Wall Street analysts, always attempting to endear themselves to management, have been reluctant to reduce company estimates on a micro level.

    The reduction in expectations for the S&P 500 index is only the beginning. The next phase will be companies reducing guidance and expectations for the remainder of this year and next. On Wednesday, Textron (TXT) lowered its profit guidance for 2011 earnings. Expect to see more of these announcements as the third quarter comes to a close at the end of September.

    The Wells Fargo analyst is suggesting that investors be underweight industrial, energy and material companies. Here are five S&P 500 stocks likely to be hit by lowered estimates.

     

    DuPont

    A slower economy and higher oil prices is a double whammy for the chemical industry. Oil is a key component for most chemicals, and without the ability to pass along higher material costs to consumers, margins could suffer. I expect DuPont (DD) to be hit particularly hard by a slowing economy.

    Since the market bottomed in early 2009, DuPont has gained more than 150%. Since mid-July, the stock has shed 15% of its value on concerns regarding a slower economy. Thus far, those concerns have not materialized in results. For the most-recent quarter ended June 30, the company beat analyst profit estimates by 3 cents per share. That is a good result, but the size of DuPont’s earnings beats have been shrinking for the last three quarters.

    Estimates going forward are actually on the rise. For 2012, the average Wall Street estimate is at $4.56 per share; 90 days ago, the estimate was for $4.35 per share. Wells Fargo cut 2012 earnings estimates for the S&P 500 by 5%; if we extrapolate that to individual stocks and take 5% off DuPont's $4.35 estimate, we get earnings of $4.13 per share. That would imply growth of only 3.5% from the 2011 estimated earnings of $3.99 per share.

    With shares trading for 11 times 2011 estimates, a lower growth rate in profits would suggest a much lower multiple. An earnings multiple of, say, 8 would net a stock price of $33 per share, much lower than where DuPont trades today.

    DuPont, one of the top-yielding chemicals stocks, shows up on a recent list of Dividend Stocks for "30-Year" Investors.

    Lockheed Martin

    Defense industry stocks are fighting not only a slower economy and rising commodity prices but also cuts to government spending. The budget deficit and federal debt are front-and-center issues that put the spot light on military spending. In response, defense contractors are waging a public relations battle to prevent further reductions in spending.

    Lockheed Martin (LMT) shares fell off a cliff in July but have since rebounded. On an operating basis, the company is performing well. In the most-recent quarter ended June 30, the company delivered profits that exceeded the average Wall Street estimate by 21 cents per share. Going forward, analyst estimates for 2012 are only fractionally lower compared with where they stood 90 days ago.

    The current estimate for earnings next year now stands at $8.63 per share. A 5% reduction in that estimate, following Wells Fargo's 5% cut to 2012 S&P 500 earnings, puts the number at $8.20 per share, or only 9.5% higher than 2011 estimated earnings of $7.49 per share. If profit growth falls below 10%, a more reasonable multiple to earnings for the stock would be 6 to 8 times earnings. Using 7 times earnings nets a share price of $57.40 per share, well below current prices of $75 per share.

    Lockheed Martin is one of the top-yielding aerospace and defense stocks.


    Norfolk Southern

    As the economy slows, things grind to a halt. The fewer goods and services provided, the less demand for transportation, and transportation stocks tend to suffer in a recession. Indeed the expectation of a double-dip recession resulted in a decline in transportation stocks.

    For train operator Norfolk Southern (NSC), the losses have been modest. Shares are down 13% since mid-July. For now, the losses are based on pure speculation. Operating profits have exceeded Wall Street estimates in each of the last two quarters. The concern for investors is the future, but so far, Wall Street analysts have a rosy forecast for the company.

    The average estimate for 2012 earnings is $5.87 per share, which is higher than the $5.66 per share estimate 90 days ago. If you slash the $5.66 estimate by 5%, based on Wells Fargo's 5% cut to 2012 S&P 500 earnings, earnings come in only 4% higher than the 2011 estimate of $5.15 per share.

    At current prices, Norfolk Southern trades for 13 times estimated earnings. If profit growth is below 5% next year, the market will most surely assign a multiple to earnings of 10 or lower. A 10 earnings multiple on reduced 2012 estimated earnings yields a stock price of only $54 per share, well below current prices.

    Norfolk Souther is one of TheStreet Ratings' top-rated railroad stocks, and it shows up in the portfolio of Tweedy Browne as of the most recently reported quarter.

    Airgas

    Airgas (ARG) provides industrial gas services to builders and businesses around the country. A reduction in economic activity will likely negatively impact future sales and profits. During the July market meltdown, shares of Airgas slipped 15%.

    On an operating basis, the company has been a steady performer, beating average Wall Street estimates in each of the last four quarters. The size of the beats has been small, though, and any change in future expectations could hit the stock significantly. For the current fiscal year ending on March 31, 2012, analyst estimates have increased over the last 90 days to $4 per share. In the following fiscal year, the estimates have increased by a penny per share over the last three months.

    If 2013 estimates are lowered by 5%, based on Wells Fargo's 5% cut to 2012 S&P 500 earnings, year-over-year growth in profits as estimated would amount to 9%. Shares currently trade for 16 times current year-estimates of $4 per share. A 9 multiple of earnings applied to that estimate results in a share price of $36 per share. Any real reduction in analyst expectations could be met by a steep drop in share price.

    Airgas, one of Jim Cramer's Good-News-in-Trucking Stocks, was highlighted in "6 Stocks Still Hiking Dividends in This Market."

    Fluor

    Large government contract construction company Fluor (FLR) is facing several headwinds at the moment. Much of its work is coming from a government overwhelmed with debt and charged to reduce spending, which does not bode well for the future. A double-dip recession would not help matters.

    For now, those worries have yet to manifest in the form of lower share price or reduced profit expectations. Shares have declined some, but since the middle of July, Fluor has lost only 7%. Earnings estimates for the current year and next are on the rise, thanks in part to an earnings beat of 13 cents per share in the quarter ended June 30. For 2012, the average Wall Street estimate has increased from $3.95 per share to $4.04 per share over the last 90 days.

    Had the 2012 estimate decreased by 5% instead, as Wells Fargo has reduced its 2012 earnings expectations for the S&P 500 by 5%, the estimate would be at $3.75 per share, 10% higher than 2011 estimated earnings of $3.40. With shares trading for 18 times current-year estimates, there is plenty of room for Fluor to adjust lower. Put a 15 multiple on 2011 estimated earnings and you get a share price of $51 per share. This stock could fall hard if earnings estimates are lowered.

    Fluor is one of TheStreet Ratings' top-rated construction and engineering stocks.

    To see these stocks in action, visit the 5 S&P 500 Stocks Likely to Be Hit by Lowered Estimates portfolio.

    -- Written by Jamie Dlugosch in Minneapolis.

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    >>5 Loser Stocks Poised for Rebounds

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    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.