3 Earning Results that Could Lead to a Long-Term Trend Higher

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Earnings and earning-related news is the number one catalyst for stock movement. A strong quarter can dictate the direction of a stock for the following three months as can a bad quarter; in the past I have written in detail about such subjects, a domino effect following a strong or bad quarter. In this piece I am looking at three stocks that might see a long-term trend as a result of earnings.

Lumber Liquidators Holdings (NYSE: LL) rallied higher by more than 3% after reporting earnings that easily exceeded expectations. The company grew its revenue by more than 20% year-over-year to $210.7 million, beating the consensus by almost $13 million. Its EPS of $0.50 was $0.07 better than expectations, which represents net income growth of 63.2% yoy. The company also improved gross margins and gave guidance that suggests yet another great year in 2013.

There are some who believe that LL is too expensive. The stock trades with a P/E ratio of 43.53, which is far more than competitor The Home Depot (NYSE: HD). Yet one thing to remember is that although LL is twice as expensive as The Home Depot (P/E ratio 23.78), Lumber Liquidators is growing sales by 20% and income by over 60%.

On the other hand, The Home Depot’s margins are near maxed, and it's growing revenue by less than 5% yoy. Therefore, with Lumber Liquidators growing four times faster, it's fair to suggest that it deserves double the valuation, and that it could continue to trade considerably higher.

The Medicines Company (NASDAQ: MDCO) has performed well over the last three months, and then saw another 5% boost on Wednesday after reporting earnings. The company easily surpassed expectations with revenue growth of 20.6%, and beat bottom line consensus by $0.27 with an EPS of $0.78.

The stock reached new 52-week highs on Wednesday and now is trading with a P/E ratio of 36.25 and a price/sales of 3.10, making it a fair value stock in the biotechnology space. Currently, investors had been looking forward to the approval of cangrelor, a product that produced positive results in a Phase 3 trial early last month.

In the quarter, international sales of Angiomax/Angiox grew nearly 80%, and for this reason, combined with new product launches, it is very likely that The Medicines Company will continue to trend higher.

Herbalife (NYSE: HLF) is a very dangerous short-term trade at this very moment. The company continues to be at the center of controversy, and despite a very strong earnings report, the stock has traded lower by more than 4% on Wednesday.  The company beat on both the top and bottom line expectations, and raised its guidance for 2013. The company is now expecting sales growth in the range of 12%-14% in 2013, which is far above GDP.

If you look at the fundamentals alone, then this is a very cheap stock. Herbalife is trading with a forward P/E ratio of just 7.34 and a price/sales of 1.10, which is not consistent with companies that are growing by double digits yoy.

The problem is the speculation/rumors surrounding the company. Is it or isn’t it a pyramid scheme business, and will future regulation significantly damage its reputation and growth? These are unknown questions, making this is a very high risk investment. However, looking at what we know now, this is an undervalued company (based on fundamentals), that presents great long-term upside potential (if all is good with the structure of the business).

Conclusion

In my book, Taking Charge With Value Investing (McGraw-Hill), I examine human behavior and the psychological effects that take place in the minds of investors when a stock shoots higher or falls drastically lower (think roulette at a casino). For many investors, chasing these trends is common, even addicting, and very few are capable of realizing their losses because of their occasional gain. Investors need to avoid this behavior, and not look at the performance and then the news, but rather read the earnings report first and then make a decision based on the information within. By doing so, you will be able to find the inconsistencies and a distinction between performance and fundamentals, which creates value and allows for large returns. 

In my opinion, these three companies show very strong fundamental gains, and are quite cheap compared to their individual industries. As a result, because of this value, and strong earnings, it is very possible that we will see trends higher. 


BrianNichols has no position in any stocks mentioned. The Motley Fool recommends Home Depot and Lumber Liquidators. The Motley Fool owns shares of Lumber Liquidators and has the following options: Long Jan 2014 $50 Calls on Herbalife Ltd.. 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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