2 Bright Spots In A Lackluster Earnings Season

Michael Vodicka's picture

Wednesday, August 31, 2016 - 12:30pm

by Michael Vodicka

"Only when the tide goes out do you discover who's been swimming naked."

That's one of my favorite Warren Buffet quotes. It could probably mean lots of things when it comes to investing. But I think it's a great analogy for earnings seasons.

Earnings season is when shareholders and fund managers find out which companies have been connecting and which have been striking out.

Right now, it looks like most of the S&P 500 has been swimming naked. America's largest and most powerful companies are struggling to grow revenue and earnings.

According to data from Zacks Investment research, with 482 companies from the S&P 500 reporting second-quarter results, revenue is up 0.1% from the same period last year while earnings are down 3.6%. 

That marks the fifth consecutive quarter that earnings have contracted compared to the same period last year.

The last time that happened was in 2008 and 2009 during the financial crisis.

However, despite the slow overall growth, a good investor knows there's always a bull market somewhere. That includes the S&P 500.

Despite earnings recession, there are a handful of companies that are bucking the trend.

These companies are reporting record revenue and crushing earnings expectations in a challenging macro environment.

These companies are special for two reasons.

Number one, they are either operating in growth industries or benefiting from a competitive advantage.

Number two, they will benefit from one of Wall Street's best kept secrets. 

The Post Earnings Announcement Drift (PEAD) is the tendency for a stock's cumulative abnormal returns to drift in the direction of an earnings surprise for several weeks (or several months) following an earnings announcement. 

Take a look at the chart of return distributions below.

This study suggests that companies beating earnings expectations will be attracting the most capital in the next few months, and that influx could drive shares into a new all-time high.

This push higher is a great investment opportunity. Today, I want to help you profit from it.

Below is a list of seven of the best positive earnings surprises in an otherwise dreary earnings season.

 

Stock Positive Surprise
Amazon, Inc. (Nasdaq: AMZN) 56%
Dollar General (NYSE: DG) 10%
Priceline, Inc. (Nasdaq: PCLN) 12%
Google (Nasdaq: GOOGL) 8%
Microsoft (Nasdaq: MSFT) 19%
Facebook (Nasdaq: FB) 23%
Best Buy (NYSE: BBY) 36%

 

While the S&P 500 struggles to grow revenue, both of these world leaders just reported record revenue and earnings. And looking forward, I am expecting more of the same in the second half of the year. From this group, two caught my attention in particular. 

Amazon, Inc. (Nasdaq: AMZN) is a great place for investors to find revenue and earnings growth. The company just delivered awesome second-quarter results. Earnings of $1.78 beat expectations by 56%.

Revenue was up more than 19% from the same period last year. 

The great quarter has earnings on pace to grow 362% in 2016 and another 79% in 2017. 

That strong performance and outlook has been driving Amazon's share price. 

Amazon is up 53% in the last 12 months, and recently reached a new all-time high. Notice the strong correlation between Amazon's share price and revenue growth.

Looking forward, I expect Amazon's positive earnings surprise and revenue growth to drive shares into a new all-time high by the end of the year.

Facebook, Inc. (Nasdaq: FB) just reported one of its best quarters ever. Second-quarter earnings of $0.76 per share beat expectations by 23%. Revenue of more than $22 billion in the last 12 months was a new all-time high. Facebook has been rallying all year. 

Shares are up 18% in 2016, and 43% in the last 12 months. Facebook is projected to grow earnings by 35% in 2017. Once again, I expect the company's recent positive earnings surprise and future earnings growth to drive shares into a new all-time high by the end of the year. 

Risks To Consider: Amazon and Facebook aren't exactly value plays. Amazon trades at more than 70 times projected 2017 earnings. Although that is relatively high valuation compared to its peers, Amazon's high P/E ratio hasn't stopped it from being one of the best performing stocks in the S&P 500 in the last ten years. 

Action To Take: For investors with at least a 3-year time horizon, I recommend shares of both Facebook and Amazon as core equity holdings. For investor with a time horizon less than three years, consider cash, CDs, money markets or low-risk bonds.

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Michael Vodicka does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.