Should You Buy These High-Profile Stocks After Monday’s Earnings?

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

Trying to determine whether to buy, sell, or hold after earnings can be a tricky business. Often times, retail investors incorrectly assess earnings and the performance that is created. Therefore, I am looking at three stocks that moved on Monday to determine if post-earning reactions create value, or not.

A Stock I Wouldn’t Touch Right Now

After a 25% loss over the last year (compared with a 12% gain on the Dow Jones), shares of Caterpillar (NYSE: CAT) traded higher by 2.83% on Tuesday after reporting earnings. The company actually missed on both the top and bottom line, yet earnings were better than many had feared. For the quarter, CAT saw a 17% year-over-year (yoy) decline in revenue, as its Resource Industries segment continues to drag down its overall business. Furthermore, the company issued guidance that was below the consensus, by an estimated $5 billion in lower revenue!

With Caterpillar posting such an ugly quarter, it is hard to determine why the stock might have traded higher. One belief is that the company will soon boost its stock repurchase program, although there is no confirmation. In my opinion, there is absolutely no reason to buy this stock, at least not right now. What’s frustrating is that Caterpillar is the majority presence in the mining equipment business, and has not given good visibility to the market in terms of expectations.

What we do know is that sales of its traditional mining machines are expected to fall 50% in 2013, and this is based on inflated commodity prices. Therefore, with the market near all-time highs, any pullback could drastically lower commodities, hence causing worse fundamentals for CAT. As a result, I wouldn’t buy, not even at 10 times earnings, as fundamental performance is highly unpredictable.

A Cheap Under-the-Radar Stock Worth Watching

B/E Aerospace (NASDAQ: BEAV) is not a household name, although it has quietly staged a near 25% return in 2013 and is near new all-time highs. On Monday it rallied 3.4% as revenue growth of 12.7% yoy led to a better than expected top-line and 31% net earnings growth led the company to both improved margins and a beat on the bottom line. The company saw double digit growth in all three of its segments, including 12% in its commercial aircraft business.

While B/E Aerospace’s earnings are exciting, some are concerned that its rapid growth is only due to strength in the new aircraft delivery cycle. However, one must also acknowledge that over 60% of its revenue was driven by demand for products in newly purchased aircrafts, within all three of its cycles. In other words, there is reason to be highly optimistic that growth is sustainable, and at 14.50 times next year’s earnings, this is still a very cheap stock worth buying.

A Great All Around Quarter

Six Flags Entertainment Corporation (NYSE: SIX) saw incredible gains of 8.22% as the company easily exceeded all expectations. The company’s top line growth of 32% was impressive by itself, but not nearly as impressive as the degree to which Six Flags beat the consensus on both the top and bottom line.

While some of this performance was due to a calendar shift, much was related to the company’s improvement in selling seasonal passes. When you look at the company as a whole, it continues to improve and upgrade its parks, offer better pricing, and strengthen its balance sheet. In terms of valuation, the stock’s not expensive, and when you incorporate its yield of more than 5.00%, I say SIX is a “Buy”.

Conclusion

“Instead of worrying about quarterly performance and expectations, focus on the company’s valuation relative to its fundamentals. You can then use the craziness of earnings to your advantage.” Taking Charge With Value Investing (McGraw-Hill, 2013)

Far too often, investors only care about top/bottom line beats and stock performance. They don’t take time to assess the valuation of the company to determine if the move was fundamentally warranted. Earnings can be your greatest period of opportunity, as you can capitalize on the beginning of long-term trends, incorrect trends, or it can give you an opportunity to take profits. The first step to producing larger gains is by simply reading the quarterly report first and then looking at the stock second. By doing so I think you’ll be surprised at how much larger your returns can become, if put into action. 


Brian Nichols has no position in any stocks mentioned. 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!

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