Four Controversial Stocks You Might Want to Buy Post-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 four controversial companies that reported earnings last week that might be worth a look, regardless of stock performance.

Is it Time to Buy this Fallen Retailer?

Best Buy (NYSE: BBY) traded higher last Friday by 4.57% after posting earnings, and despite the fact that talks of a potential buyout have fallen apart. The company’s earnings were solid, beating on both the top and bottom line with free cash flow that was almost double expectations.

While Best Buy’s growth of just 0.9% is modest and is below GDP, this is a stock that is so cheap that significant earnings growth is not needed for the stock to trade considerably higher. This is a stock that pays out a dividend of more than 4% and is trading with a price/sales of just 0.11. The company is looking to benefit from new legislation that will tax all online retailers (such as Amazon) which will level the playing field and prevent window shoppers. This future catalyst combined with its strong quarter and undervalued buy makes it a compelling long-term investment.

Some Think it’s too Expensive Yet Future Still Looks Bright

After a strong quarterly report, Salesforce.com (NYSE: CRM) is now trading at new all-time highs. The stock rallied 7.55% after beating on both the top and bottom line with revenue growth of 32% year-over-year (yoy). Furthermore, the company increased guidance for its upcoming quarter and 2013, saw free cash-flow increase 18%, and increased its headcount an incredible 482% over the previous quarter.

At first glance, Salesforce.com looks expensive with a price/sales of 8.04, but when you compare it to the industry and a company such as Workday’s price/sales ratio of 39, you realize that CRM is either fairly valued or undervalued. In the company’s conference call, CEO Marc Benioff said, “We’re going to buy small and big. We are going to be aggressive.” To me, with the space growing so fast and with there being a lot of cheap private companies in the space, I’d watch for significant M&A action from Salesforce.com and potentially larger gains.

A Potential Bottom Found After Earnings

After a 45% loss over the last year, shares of Deckers Outdoor (NASDAQ: DECK) posted a 15.37% gain on Friday following earnings. The company’s quarter was mixed, missing on the top but beating on the bottom line. However, what pushed the stock higher was most likely the company’s guidance, its expectations to grow sales by 7% and EPS by 5% compared to 2012.

Deckers is currently trading with a price/sales of 1.00 and a forward P/E ratio of 11.0, which is very cheap compared to its industry. The expectations for this company are very low, thanks mostly to its horrible year in 2012. But with expectations being so low, there is a realistic possibility of large gains with strong performance. Therefore, following its recent quarter and its guidance, I think DECK is a “buy.”

Flat-Trading Fast-Growing Stock Will Rise in Time

Shares of Kodiak Oil & Gas (NYSE: KOG) has been one of the better performing energy stocks over the last five years, but traded relatively flat on Friday after reporting earnings. The company actually missed on both the top and bottom line, yet grew its oil and gas sales by 138% yoy and 17% over the previous quarter.

The growth of Kodiak is mindboggling, as the company continues to ramp up production. For example, in Q4 of 2011 the company was selling 7,200 BOE per day, but during the last quarter this number was increased to 18,200 per day. With that being said, the stock is a bit expensive with a price/sales of 5.78 yet has profit margins over 30%. The good news is that since the stock traded flat throughout 2012, it is better positioned to rally. Therefore, I’d buy following yet another quarter of >100% growth.

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 has no position in any stocks mentioned. The Motley Fool recommends Salesforce.com. 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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