Stock Quotes in this Article: DHI, GT, H, TOL, VMED

BALTIMORE (Stockpickr) --Earnings season is by far the biggest fundamental catalyst for stock price movement. A good earnings season can shift sentiment toward the bulls, and a bad one can send investors running for the hills. With this quarter’s earnings season kicking off in just a couple of weeks, investors could have a much-needed shift in buying sentiment coming.

But some stocks are set to do better than others right now -- and it makes sense to look at the names that are trading at a discount ahead of earnings.

A lot of factors go into the price that the market sets for a stock. But price is one thing, and value is another. Ultimately, a stock’s fundamental valuation comes down to the combined present values of the company’s future earnings; factors such as European debt and Fed policy impact share prices because the market is factoring in how it thinks they’ll affect those earnings.

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    Sometimes, though, that market “noise” can get too loud and drown out what’s really going on with a stock’s ability to earn a profit. That’s exactly what we’re seeing right now -- and it means that a handful of stocks are trading at a discount ahead of their earnings calls.

    How do you spot an earnings discount? The key is to look for how the market is responding to earnings. Today, we’re looking at companies that have revised their earnings estimates upward for the quarter but didn’t see prices adjust in kind. Generally speaking, these firms tend to have a couple of black clouds overhead, but that’s still a signal that the market may be too preoccupied with other factors to appropriately price shares.

    With that, here’s a look at five earnings season stocks you can have at a discount right now.

    Virgin Media

    UK-based cable provider Virgin Media (VMED) is one of this week’s earnings discount plays. Shares of this firm have fallen approximately 8% year-to-date as broad market weakness took its toll on investors’ opinions of this firm’s earnings prospects. But those opinions could be misguided right now.

    Virgin Media is the No. 2 pay-TV, broadband Internet, and fixed-line phone utility in the UK, with a cable network that serves more than 4.8 million customers. That network reaches approximately 13 million residents, a sign that there’s considerable room for growth in VMED’s core market.

    Another opportunity comes from focusing on high margin cross-selling opportunities among its existing customers. By increasing the revenue it generates per subscriber, the firm is taking advantage of the low-hanging fruit and avoiding excessive acquisition costs.

    The TV business is capital-intense, particularly for Virgin Media, whose relatively newer network leaves the firm with a fairly substantial debt load. Still, current central banking policies are doing wonders for debtors right now -- and VMED recently refinanced its debt to stretch out maturities and increase liquidity.

    Recently, the company has been starting to get some love from Wall Street. In the last month, analysts at Goldman Sachs, Barclays Capital and Deutsche Bank either initiated a buy rating on shares of Virgin Media or reiterated a previous buy rating on the stock. But the key for us is the lack of price movement following upward earnings revisions. Third-quarter earnings on Oct. 26 could be a big catalyst for shares to climb.

    Virgin Media, which I also featured in "5 Rocket Stocks to Buy for Another Volatile Week," shows up on a recent list of 10 Risky Media Stocks.

    Hyatt Hotels

    Luxury hotelier Hyatt Hotels (H) has seen its shares get knocked a little harder in 2011. Shares of the firm, which only saw its IPO back at the end of 2009, have slid approximately 28% year-to-date. But earnings improvement could turn that tide in share price.

    Hyatt operates 456 hotel properties worldwide, a mix of company-owned, managed and franchised hotels. In an industry where most hotel operators try to avoid owning hotels themselves (it’s a very capital-intense business), Hyatt is actively increasing its property portfolio to include more owned hotels.

    Hotel ownership is a lower-margin business, but it’s a move toward larger total profits -- a reasonable tradeoff that’s not going to be fully appreciated in turbulent market conditions. Presently, Hyatt is overexposed to the U.S. hotel market. The firm generated almost 80% of sales domestically last year (skewed in part because of its ownership of many of its U.S. hotels), and investors would certainly welcome some added overseas exposure.

    From a financial perspective, Hyatt currently holds more than $1.7 billion in cash and AFS assets, a position that gives the firm plenty of balance sheet liquidity right now. That’s a net cash position of nearly $1 billion when the firm’s debt is factored out. While hotel ownership may be a capital-intense business, the lack of leverage in Hyatt’s operations should make it worth the tradeoff. Expect a potential catalyst in third-quarter earnings at the beginning of November.

    Hyatt shows up on a recent list of Stocks With Big Insider Buying.

    Goodyear Tire & Rubber

    Goodyear Tire & Rubber (GT) is a globally diversified tire maker that’s one of the largest tire manufacturers in the world. Unfortunately, Goodyear’s ties to automakers aren’t limited to whom the firm does business with -- Goodyear also sports a pricey, unionized workforce that’s created a challenging cost structure amid declining demand.

    To combat cost issues, Goodyear has been working to grow margins where it can. The firm has put added focus on its higher margin product offerings, and was able to renegotiate union contracts several years ago to reduce manufacturing costs.

    While North American production remains a challenge, the real upside in Goodyear lies overseas. The firm generates the majority of its sales outside of North America, where it’s able to generate more significant margins. Those efficiencies are likely to better present themselves once the economy stabilizes and the dollar calms its recent rallying.

    Goodyear has posted some challenging results in the last couple of years, but the tide is starting to turn. Three of the last five consecutive quarters were profitable for the firm -- and analysts expect another profitable quarter when GT announced earnings at the end of October.

    Goodyear is one of the top holdings of David Tepper's Appaloosa Management, comprising 5.7% of the total portfolio as of the most recently reported period.

    D.R. Horton and Toll Brothers

    It makes sense to look at mid-cap homebuilders D.R. Horton (DHI) and Toll Brothers (TOL) as a pair; after all, the same factors are impacting both of these firms’ earnings season discounts right now.

    D.R. Horton is one of the country’s largest homebuilders -- the firm sold more than 20,000 homes last year. Not surprisingly, the company was also one of the hardest-hit in the wake of the recession. In response to the floor falling out of the housing market, Horton shored up its operational profile in the wake of the crash, opting to minimize its burn rate as it stomached more potent losses from inventory write-offs. That’s helped the firm bounce back to profitability in the last year as the housing market stabilized and Horton was able to unload some of that inventory from its balance sheet.

    On the other hand, Toll Brothers operates in a slightly different niche. With its average home selling for $570,000 (more than twice the average price Horton’s homes command), Toll Brothers’ customers are wealthier homebuyers who are often somewhat insulated from recessionary pressures. While the recession did shake out the more aspirational half-million dollar homebuyers, it’s left a group of consumers who are more apt to take on mortgages at record-low rates, and are more likely to be move for new job opportunities (which, in turn, increases Toll’s sales prospects).

    Both of these firms are in solid financial health, with relatively modest debt loads and plenty of cash on hand.

    The housing market is a scary place to be invested right now, but that’s why it’s such a compelling opportunity. The discounted assets on both of these firms’ balance sheets could bode well on a longer-term horizon for investors willing to take the plunge into a housing play. Other investors who fled these names at the bottom already took the losses from the housing collapse.

    Not surprisingly, upwards earnings revisions haven’t buoyed share prices in either of these housing stocks -- earnings season could be the catalyst they need.

    Toll Brothers was featured recently in "2 Pair Trades to Protect Your Portfolio," while Horton shows up on a list of 7 Home-Related Stocks to Watch.

    To see these stocks in action, check out the Earnings Season Discount Stocks portfolio on Stockpickr.

    -- Written by Jonas Elmerraji in Baltimore.

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    At the time of publication, author had no positions in stocks mentioned.


    Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including
    Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.