Are These Top Wednesday Earning Performers a Buy?

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

A stock’s reaction after earnings doesn’t necessarily mean that the performance reflects the fundamentals, so are these stocks a buy? In this piece, I am answering this question, looking for stocks to buy and add to my Motley Fool CAPS.

Does Alibaba matter?

Yahoo! (NASDAQ: YHOO) produced the biggest move of the day, a 10% gain, and was the most watched stock after earnings. The company slightly beat on the bottom line but then missed on the top line. Moreover, the company issued Q3 guidance that was below expectations, as price per paid click continues to decline.

So, with a mediocre quarter, why did Yahoo! rally? The answer lies in its 24% stake in Alibaba, as its revenue increased 71% and its income by more than 200% year-over-year. Due to the fact that Alibaba is preparing to file for its IPO and Yahoo! is exploring monetization, many believe that its assets are hot commodities.

Still, I don’t view the strong Alibaba numbers as a replacement for disappointing Yahoo earnings. If anything, Yahoo’s quarter should be stronger due to the performance of Alibaba, but because it was not, I am not buying Yahoo!

Solid all around?

Bank of America (NYSE: BAC) popped nearly 3% after it significantly beat on both the top and bottom line. The company’s total income rose $1.5 billion over last year to $4 billion, which was much larger than expected.

More importantly than the strong quarter, was the conference call, as the company reassured investors that it looks well-positioned to meet the new 5% capital requirements by 2018. In the much debated Merrill segment, assets grew 17% as revenue saw gains of 9% year-over-year. All of this equates to a very solid quarter, and with BofA still the cheapest large bank compared to book value, I say the stock is a definite buy.

A struggling toy story

The toy maker Mattel (NASDAQ: MAT) was crushed after earnings, falling almost 7%, and the company barely missed expectations. The problem for the company lies in the fact that revenue grew just 1%, and was drug down by its iconic Barbie line, which fell 12% year-over-year. In many ways, Barbie is losing its relevance with a new generation.

At 19 times earnings, and 2.5 times sales, Mattel is significantly more expensive than the overall market. Moreover, it is growing slower and margins are falling. Therefore, I see no way in which it is presenting value, and I would avoid an investment in the company.

A thriving regional bank

PNC Financial (NYSE: PNC) is supposed to be one of the strongest regional banks in the U.S., and once again it proved it, by announcing a very solid quarter. The bank beat expectations with revenue growth of 12% and an EPS of $1.99 ($0.37 better than consensus).

PNC’s net income nearly doubled and its asset management space continues to flourish. With a book value per share of $68.46, PNC is not cheap by bank standards, but could squeeze higher overall margins with continued strength in asset management and mortgage originations. Therefore, after its 1.28% post-earnings fall, I say that PNC is a buy!

Final thoughts

Earnings can be difficult to assess, as they often challenge your ability to fairly judge a quarter due to the volatility that it creates. However, a non-biased read of the earnings report, followed by listening to the conference call, is often rewarded.

With these particular stocks, I like BofA’s quarter the most. Sure, there are some questions about future interest rates, but the stock is cheap and the quarter was strong. So far, it looks as though financials are the winner of this early earnings season, which is something you might want to note in your search for stocks.

Brian Nichols is long Bank of America. The Motley Fool recommends Bank of America and Mattel. The Motley Fool owns shares of Bank of America and PNC Financial Services. 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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