3 Top Post-Earnings Stocks Worth Exploring
Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Earnings season is one of the best times to buy stocks, as improved or disappointing reports can change the outlook for a company. The market does fairly well at valuing companies correctly, but with earnings, we can see which stocks the market misjudges with large post-earning pops and drops. In this piece, I am looking at such stocks, and determining those that still present upside following earnings.
Cheap & moving higher
Love it, like it, or hate it, Apple (NASDAQ: AAPL) is cheap, and is still a massive company. Its earnings might have been the most anticipated of the quarter, as investors desperately awaited something to catapult the stock higher. Well, with an 11% gain over the last month, and a FQ3 beat, I think Apple is trending higher, although quietly.
In the quarter, revenue grew just 1% year-over-year. However, gross margins met expectations, and iPhone sales lived through the doom and gloom that many analysts had predicted. Overall, it was a solid quarter, and now, we can look forward to new product launches. In the coming quarters, the company is expected to launch an iWatch, iPhone 5S, and a cheaper iPhone. These products combined might add to Apple's existing product-line and help boost revenue. Moreover, strong sales of the iPhone 4 and the 4S further indicate that new product launches won't completely cannibalize current offerings. These things combined make the future quite attractive for Apple.
As a side note, I would like to mention Apple's 10 times forward earnings and its price/sales ratio of 2.35. These metrics compare favorably to Microsoft's 10.5 times forward earnings and its price/sales ratio of 3.36! Clearly, with more catalysts, Apple has more upside in addition to already being very cheap.
The power of perception!
Many of you might have seen where I tweeted "$FB will touch $50 within 10 weeks." Sure, I admit it might have been an overzealous reaction, but my point was not necessarily the price target, rather Facebook's (NASDAQ: FB) quarter was a perception changer!
Facebook's earnings were, without question, the best I've seen this quarter. The company's revenue accelerated from sub-40% to over 50% year-over-year; the company has figured out mobile; and despite these improvements, it is lowering its spending! Who does that?
In this competitive market, if you want growth, then you are going to pay for it! Not Facebook, instead it's penetrating mobile with success and users are staying on the site for longer periods of time. Hence, Facebook is simply sitting back and collecting dollars.
Now, back to my original statement about perception. While it may sound far-fetched, who thought that LinkedIn would be trading at $208 after it popped from $123 to $150 back in February? Moreover, who in their right mind would've predicted Tesla at $130 after it jumped to $90 back in May? My guess is that no one would have nor could they have logically defended such short-term price targets.
Facebook might have more promise than either stock, with over 1.2 billion users to monetize. Furthermore, Facebook trades at just 13.5 times sales, compared to 20.3 times sales for LinkedIn. Therefore, when you consider the power of perception and momentum, Facebook is cheap, and would probably trade higher!
All cylinders continue to fire
Ford (NYSE: F) grew year-over-year revenue by 15% and its North American pretax profit hit an all-time record at $2.33 billion. The company easily exceeded earnings expectations, beating the revenue consensus by nearly $3 billion! In addition, the problems in Europe look to be stabilizing, as Ford hopes to be profitable in Europe by 2015. While this may sound ridiculous to some, the losses in Europe dropped from $404 million to $348 million. Thus, showing significant progress.
Yet, despite the strengths mentioned above, Ford is currently trading at the same price that it was prior to earnings. Sure, the stock rose 3% after earnings, but then fell equally in the day that followed. So, why did Ford fall in the day after earnings? As you might know, RBC slashed its rating to "sector perform" from "outperform," essentially citing valuation as the reason.
Sometimes, it's good to step back and soak in the reaction of a stock to certain events. In this case, the opinion of one analyst superseded an all-time best in pretax profit, double digit revenue growth, and emerging strength in Europe. Furthermore, Ford is dirt cheap, regardless of its one-year 90% return.
For example, the S&P 500 has gained 33% since January 2011. In the meantime, Ford has lost nearly 7% of its value. Therefore, I find it laughable, even somewhat irresponsible, to suggest that Ford, at 10 times earnings and 0.47 times sales, is expensive. Hence, I anticipate a major post-earnings bounce from a company that is leading the U.S. in fundamental growth.
I've always said that earnings season is the best time to capitalize on value. You can buy ahead of earnings in hope of a big pop, or you can wait, be patient, and capitalize on post-earnings value. In the case of these five stocks, I think value is obvious, and that gains will follow each company's quarterly report.
The best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.
Brian Nichols owns shares of Apple, Facebook, and Ford. The Motley Fool recommends Apple, Facebook, and Ford. The Motley Fool owns shares of Apple, Facebook, and Ford. 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!