3 Overlooked Stocks to Buy Ahead of Earnings

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

What’s been the biggest surprise in earnings season thus far?

In my view, Apple CEO Tim Cook stole the show when his company announced plans to issue debt in order to return a greater amount of capital to shareholders. Prior to the earnings announcement, the Silicon Valley giant received copious amounts of criticism that its board of directors had become deaf to investors.

Shares of Apple have rallied following the earnings release, a visible sign of approval from the investment community. Earnings season can often catch investors by surprise, in the case of Apple with a positive swing to the upside. Other times, an unforeseen negative announcement may result in losses and cause one to reevaluate their investment thesis.

I encourage readers to assess the fundamentals of their stock positions heading into quarterly earnings. Here are three stocks I’ve identified that appear well-positioned ahead of upcoming reports.

Electronic Arts - Tuesday, May 7; EPS $0.58 / Revenue $1.04 billion

The video game industry is a cyclical business, and I believe Electronic Arts (NASDAQ: EA) is poised to benefit from the upcoming new generation of entertainment consoles. Microsoft is planning to unveil the next version of its popular Xbox console on May 21. Sony responded to Microsoft’s announcement by unveiling a new Dual Shock 4 (DS4) Controller for Playstation 4, also pending a fall release date.

A new generation of gaming systems with new hardware capabilities has a strong correlation with demand for video games. New York-based Brean Capital reiterated its “buy” rating and $22 price target on Electronic Arts in late March, citing benefits from the upcoming console replenishment, the potential for expanded margins, and a solid balance sheet. Analysts at Piper Jaffray have a similar opinion and maintain a $23 price target.

For the current quarter, investors will be looking for greater clarity regarding Electronic Arts’ search for a new CEO and recent layoffs reported on the EA blog and numerous media outlets. The company announced in mid-March that John Riccitiello would resign as CEO effective March 30, following an indecisive leadership strategy that was poorly received by employees and investors.

Wall Street viewed the CEO departure as a positive development for EA, and the upcoming video game cycle will allow for a “business reset.” I expect management to provide strong guidance on the conference call and the announcement of a new permanent CEO will serve as a second catalyst.

ValueClick - Tuesday, May 7; EPS $0.40 / Revenue $166.7 million

ValueClick  (NASDAQ: VCLK) is a digital marketing services firm that operates in four segments: Affiliate Marketing, Media, Owned & Operated Websites, and Technology.

Among its portfolio of brands, ValueClick owns Commission Junction, the undisputed leader in affiliate marketing, as well as PriceRunner, the U.K.’s number 1 price comparison website.

Management released fourth quarter earnings on Feb. 13, followed by a presentation at Goldman Sachs Technology and Internet Conference on Feb. 14. Revenue grew 14% year-over-year to $199.6 million, while earnings grew to $0.56 from a previous $0.46. The earnings strength was driven by higher margins and growth in the Media division.

ValueClick’s Media segment allows advertisers to reach 79% of Internet users, similar to the function of the Display Network offered by Google, its larger competitor. ValueClick works with medium-sized businesses all the way to Fortune 500 companies such as Cisco, Toyota, and Disney in order to reach consumers through its display advertising.

For the current quarter, management provided guidance of “high teens” revenue growth for Media. Revenue at ValueClick has grown 25% in the last 12 months, while earnings have grown only 7%. I expect earnings growth to accelerate in coming quarters, as evidenced by the improved 38.6% operating margin during Q4 2012 (34.8% prior year).

Wall Street is optimistic ahead of Tuesday’s results. Analysts at Jefferies raised the stock to “buy” from “hold” with a new $35 price target based on the long-term secular growth story. Needham & Company also raised their price target to $34 in recent months.

While not a direct corollary, Facebook reported strong growth in mobile advertising during its Q1 results on May 1. Advertising revenue grew 43% year-over-year during the first quarter. I believe this bodes well for ValueClick’s upcoming earnings, as businesses expand to the latter's display advertising and mobile offerings.

Walt Disney - Tuesday, May 7 2013; EPS $0.76 / Revenue $10.50 billion

Disney (NYSE: DIS) gained the attention of Wall Street when Robert Downey Jr., the actor who plays Iron Man’s Tony Stark, rang the opening bell of the New York Stock Exchange on April 30 along with executives from Marvel Entertainment.

Shares of Disney are reaching fresh all-time highs in early May, in possible recognition of Iron Man 3’s opening weekend in the United States. Disney also received approval to release the new film in China during the same May 3 weekend, in order to step in front of pirates who hope to illegally distribute the movie overseas following the U.S. release.

I wrote positively on Disney back on Dec. 3 with my editorial Disney Renews Shareholder Commitment, Remains Strong Buy, discussing CEO Bob Iger’s purchase of Lucasfilm, owner of the Star Wars brand and my personal favorite Indiana Jones (among others). At the time, Disney management received criticism from the acquisition. Fast forward to present time, and the stock has rallied from beneath $50 to greater than $63 per share.

All in all, everything seems to be going right at Disney, including its strong television franchises and profitable theme parks. ESPN received high viewership for its NFL draft coverage. Disney Junior has also unseated Nick Jr. (Viacom) as the leader on cable television for preschool children, based on preference for Sofia the First over Dora the Explorer.

Ahead of Tuesday’s upcoming earnings release, analysts at UBS upgraded Disney to “buy” from “neutral” with a new $72 price target. The Swiss investment firm cited increased profits from reverse compensation, retransmission consent, expanding margins at theme parks, and benefits from the Lucasfilm acquisition.

I continue to view Disney positively, and the company has a full movie schedule going out to 2015 including Thor, Captain America, Avengers 2, and Star Wars 7, which is likely to be a blockbuster.

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John Macris has no position in any stocks mentioned. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of Walt Disney. 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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