Three Stocks to Buy 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.

Earnings can dictate the direction of a stock for the following three months. Investors pay close attention to earnings and often make emotional decisions based on the performance of a stock post-earnings. However, the performance of a stock following earnings should never be the first line of research, rather the last. With that being said, I am looking at three stocks that I believe are a buy right now based on strong earnings, regardless of stock performance.

Dollar Tree (NASDAQ: DLTR)

Back in December I said to buy Dollar Tree and that its operational problems would not last. Turns out I was right, as the stock has posted gains of more than 11% following earnings. The company posted Q4 earnings that saw revenue increase 15.4% year-over-year (yoy), beating expectations but also beating on the bottom line. The company improved its operating margins by 70 basis points and saw comparable store sales increase 2.4%. Overall, it was a great quarter, and the stock responded accordingly to both the earnings and its bullish guidance.

Dollar Tree has seen a nice bounce following earnings but at $45.40 it is still more than $10 off its 52-week highs. In terms of valuation, I’d say it is fairly valued. The company is trading with a forward P/E ratio of 14.0 and a price/sales below 1.50. In my opinion, DLTR is now a buy. The psychological perception of the company has been shifted from pessimism to optimism, and sometimes this is more important than fundamental performance. As a result, I believe the stock could see a large move upwards over the next three months, and therefore I would watch it closely.

Big 5 Sporting Goods (NASDAQ: BGFV)

Shares of Big 5 immediately popped almost 8% after the company reported earnings on Tuesday. However, as the session progressed it trended lower, and has since returned gains of just 3%. The company is a competitor of both Dicks Sporting Goods and Hibbett Sports, but looks to be the best value in its space. This is a company that executed to perfection during its quarter. The company beat on both the top and bottom line, it raised guidance, and raised its dividend 33% to carry a forward yield of 2.64%.

Big 5 trades with a price/sales of 0.36 and a forward P/E ratio of 13.80, making it cheap on these two metrics alone. The big problem with the company over the last three years has been margins. However, in 2012 the company made major strides at improving these margins, and according to its guidance of $0.18-$0.24 per share (compared to expectations of $0.08) it looks as though these improvements will continue. Therefore, I say it’s time to buy this under-the-radar and undervalued stock.

Questcor Pharmaceuticals (NASDAQ: QCOR)

The biotechnology company Questcor Pharmaceuticals has traded virtually flat since announcing earnings on Wednesday, yet the company posted a huge beat over expectations. The company announced revenue of $160.5 million ($18 million better than consensus) and an EPS of $1.09 ($0.12 better than the consensus) due to strong growth from its drug Acthar. These numbers represent growth of 113% yoy, as Acthar prescriptions grew in the treatment of nephrotic syndrome, MS relapses, and infantile spasms.

It has been a tough year for Questcor Pharmaceuticals. The company was attacked by famed short-seller Andrew Left from Citron Research and then had to adjust when health insurers cut coverage on its drug. The main question surrounding this company is sustainability of Acthar, as this is a company that relies on just one product’s success. However, Questcor recently acquired a clinical stage company to create diversification and with more than 100% growth it’s obvious that these concerns are not currently affecting the company. Therefore, with a forward P/E ratio of just 6.64 and a price/sales of 3.79 I believe QCOR is a must buy, as a company that just keeps on growing.

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), with one scenario being earnings. 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 after earnings, and look not at the performance of the stock but rather the performance of the quarter. 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. 


BrianNichols is long QCOR, BGFV, and DLTR The Motley Fool has no position in any of the stocks mentioned. 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!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure