Two Great Opportunities After Earnings

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Tuesday was loaded with big name earning releases, and even bigger moves in stock performance after earnings were released. So far in Q1, market earnings have been strong, with 63.9% of companies beating expectations and another 60.8% beating revenue expectations (the main concern this season). With that being said, strong earnings don’t always produce a move higher, and bad earnings don’t always indicate a fall. Therefore, I am looking at two of the most unwarranted reactions to earnings of the day.

Seagate Technologies (NASDAQ: STX)

There’s no stock that even comes close to this one. Seagate Technologies fell 10% on Tuesday after crushing top and bottom line expectations by a large margin. After announcing its earnings, the stock immediately popped 3% higher in after-hours trading. The company’s guidance was slightly below expectations for Q2 and some are expressing concerns over its $40 million investment in server flash memory module maker Virident.

Initially, the market got this right when Seagate traded higher by 3%. However, then the market got it way wrong with a classic example of overreaction. The company’s CFO, Pat O’Malley, specifically said that they are guiding “conservatively” because the input is conservative. They are giving the market something that is easily attainable. However, this should have been expected: The stock trades with a P/E ratio of 5.0; it’s not a momentum stock, but rather a high-yield value investment.

On the call the company disclosed that they returned over 95% of operating cash flow in the form of share redemptions and dividends. They already raised the dividend 20% and continue to outperform in a struggling industry. Bottom line: This is the kind of stock you want to own, and this crazy reaction is providing a grand opportunity. Its earnings were a huge beat and the market should have expected conservative guidance due to the stock being valued so cheaply.

Ford (NYSE: F)

Much like Seagate Technologies, Ford crushed expectations, beating revenue estimates by more than $3.3 billion! The company had incredible results in North America; saw total production rise 9%; grew in China by 41% and boosted its market share; and see 2013 resulting in an increase in market share. At first, Ford popped 2.5%, but began to sink until closing on Tuesday with losses of almost 5%. So why did it fall? The answer is Europe!

Is it a surprise to anyone that Europe remains a challenge for the auto industry? Well, if it a surprise then you don’t follow the space very well. Yet it was this fact that pushed the stock lower, as all other news was positive. The company said that losses in Europe could mount to $2 billion. However, the company also said that it now believes this to be a bottom in Europe.

What does this mean to investors? It means that with a price/sales of 0.4 and a forward P/E ratio of 9, Ford is now a great value investment with nothing but better European days ahead of it. My take is that investors should have read through the bad news and realized that from this point forward, earnings will improve in Europe.

Conclusion

If used correctly, earnings can be the best opportunity to buy a fundamentally strong company at a discount price. The fact of the matter is that sometimes the market gets it wrong, and especially in the case of Ford and Seagate we’re looking at two stocks that should have traded higher rather than lower. In my book, I talk in great detail about earnings and its psychological impact, as often investors sell without knowing why, just to avoid immediate loss. This is an unwise investment strategy when such value presents itself. These are two high-yield stocks that have shown great promise over the last two years. Therefore, I suggest additional due diligence to determine the best play for these stocks, and to continue assessing performance after earnings as a way to capitalize on value. 


BrianNichols owns shares of Ford and STX. The Motley Fool recommends Ford. The Motley Fool owns shares of Ford. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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