Three Bargains from Earnings Season
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Analysts and the financial media are usually behind the curve when it comes to finding the best investment opportunities. Everybody likes a stock when the news flowing about the company is optimistic and its price is on the rise, but that's precisely when stocks are usually more expensive. If you want to buy at a discount, it's better to wait for some kind on negative news affecting the price of the stock in the middle term.
As long as nothing has changed from a fundamental standpoint, a disappointing earnings report can be a great opportunity to capitalize on the market's tendency to overreact, especially when in it's a reaction to bad news. Investors who are well prepared and have enough dry powder to go shopping during times of opportunity are in an advantaged position to generate superior returns from disappointing earnings reports.
Starbucks (NASDAQ: SBUX) was trading near $45 in the first days of 2012; it then went to historical highs above $60 in April and has since them come down to below $45 again. The company reported unexpectedly soft earnings last week, and that was one of the main reasons behind the price fall. Starbucks is feeling the effects of a weakening consumer environment in Europe and the US, but the company should continue growing smoothly in the long term.
Starbucks has a differentiated brand that commands a premium pricing, producing high profitability for the company and its investors. Growth opportunities look exciting too -- emerging markets are still in their first stages for Starbucks, and there is a lot of room for expansion in those geographies. Also, the company has introduced new products to its extensive network, which is a smart strategy to generate growth without investing too much capital.
Starbucks is as solid as ever, but the stock is trading at a discount of more than 25% versus its April top, so it looks like a nice opportunity to grab a tasty coffee at an opportunistic price.
Speaking about tasty products and attractive valuations, McDonald's (NYSE: MCD) is looking quite tempting after a bunch of disappointing quarters. The fast food empire has been investing heavily in marketing for the Olympic Games, and profit margins are under pressure due to rising commodity prices and the company's focus toward value offerings. But McDonald's still owns one of the most valuable brands in the world, and the company has presence in the most desirable commercial space around the planet. The company will need to adapt to changing consumer habits like the trend toward healthier food, but McDonald's has the financial and managerial resources to continue delivering solid results in the future.
On the subject of adaptation and change, Ford (NYSE: F) is one outstanding example of a successful comeback by an American industrial company. Over the last years Ford has streamlined its operations, started cleaning its balance sheet and, more importantly, recovered the respect and consideration it had lost from customers around the world.
The auto industry is tremendously competitive; it requires big capital investments and profitability is usually scarce. Furthermore, Ford has been suffering the consequences of the global economic slowdown, which has produced lackluster sales of Ford products outside the US during the last quarters.
But the company is improving, and it looks dirt cheap at a forward P/E ratio below 6. As long as Ford keeps going through the right path, current earnings weakness may provide an attractive entry point for those who can stand the volatility in the long term.
Patience can be a powerful ally for long-term investors, and waiting for an attractive entry point can provide a considerable boost to portfolio returns over time. These three global corporations are being affected by transitory weakness, and they could be good candidates for an opportunistic purchase.
acardenal has no positions in the stocks mentioned above. The Motley Fool owns shares of Ford, McDonald's, and Starbucks. Motley Fool newsletter services recommend Ford, McDonald's, and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.