Looking for Growth? 3 Undervalued 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.

Market participants are entering the week of May 13 with fresh memory of two major conferences held this month.

First, Berkshire Hathaway held its annual meeting back on May 4. Investors were actively discussing Warren Buffett's noteworthy statements from the opening bell on Monday, May 6 through the closing print on May 10. I expect the conversation to continue for some time.

Looking to the stock market, Mr. Buffett touted his large investment in Wells Fargo, which became Berkshire’s largest position over Coca-Cola during Q4 2012. America’s wealthiest man stated that Wells Fargo is a great play on loan growth and a recovering housing market. Buffett also characterized bonds as a “terrible investment,” stating that the Federal Reserve will ultimately unwind its $85 billion monthly purchase plan and cause negative effects on the bond market.

Many of Wall Street’s most powerful investors also attended the SALT Conference in Las Vegas during May 7-10, discussing the ongoing influence of the Federal Reserve bank on the U.S. economy.

All in all, the “sell in May and go away” mantra doesn’t seem to be holding true this year as the marketplace is abuzz with fresh information and active discussion. Despite the broader market being fairly valued at 16x earnings, I believe readers can still find undervalued stocks with strong growth prospects.

Here are three companies that I view as undervalued with upcoming reports:

Macy’s
Wednesday, May 15 before market open; EPS $0.53 / Revenue $6.39 billion

Macy’s (NYSE: M) operates approximately 840 department stores in 45 states under its namesake Macy’s and Bloomingdale’s brands, in addition to macys.com and bloomingdales.com websites.

The Cincinnati, OH retailer has seen its shares rise more than 21% year-to-date, outpacing the S&P 500’s 14% gain. I wrote positively on Macy’s with my editorial Four Reasons to Buy Macy's, Dillard's, and Sell J.C. Penney back on April 13. Shares have risen more than 6% in a single month, compared to less than 3% for the broader market.

Macy’s has achieved record profitability in recent quarters following a major restructuring effort in 2009, which resulted in operating expense cuts and greater efficiency through the My Macy’s internal initiative.

For the current quarter, investors will be looking to see continued sales growth in Macy’s omni-channel strategy. Revenue at macys.com and bloomingdales.com grew a massive 48.9% year-over-year in January 2013, the last month in which management reported comparable sales. Macy’s will provide updated figures for the February - April period as part of the upcoming earnings release.

Wall Street is also optimistic about Macy’s heading into Q1 2013 earnings. Analysts at the New York-based Maxim Group raised their price target on ticker symbol M to $56 from a previous $50 as recently as May 9.

I believe management will also increase Macy’s dividend and announce a new share repurchase plan before year-end. The company’s fiscal year ends on Feb. 1, 2014.

Nordstrom
Thursday, May 16 after market close; EPS $0.76 / Revenue $2.80 billion

Nordstrom (NYSE: JWN) operates 245 upscale stores in 31 states, including 117 full-line stores and 124 Nordstrom Rack off-price locations. The company’s goal is to maintain its position as North America’s leading fashion retailer.

Management is hoping to achieve growth through momentum in women’s apparel and select new store openings.

The company has announced the opening of 12 new Nordstrom Rack locations year-to-date, which offers an assortment of Nordstrom’s designer goods at marked down prices. While most retailers outsource their unsold inventory to third parties at a significant discount, Nordstrom operates its own set of off-price stores in select locations where cannibalization from full-priced stores is unlikely. In turn, the company preserves a degree of additional operating profitability.

Numerous firms on Wall Street have spoken positively on Nordstrom ahead of Q1 2013 results. New York-based Topeka Capital Markets initiated coverage of Nordstrom with a “buy” rating and $63 price target back on April 11. Analysts at BB&T are the most optimistic on Wall Street, maintaining a “buy” rating and $85 price target on the upscale retailer.

Revenue at Nordstrom has grown 11.7% in the last 12 months, while earnings have increased at at 13.5% rate. Management has stated its plans to reach $20 billion in sales by the end of the current decade. Sales exceeded $10 billion during 2012 and are expected to fall shy of $13 billion during the current fiscal year.

Taylor Morrison Home Corporation
Wednesday, May 14 after market close; EPS $0.09 / Revenue $378.6 million

Taylor Morrison Homes (NYSE: TMHC) is a $3 billion homebuilder which operates under its namesake Taylor Morrison brand in the United States and the Monarch brand in Canada.

The Scottsdale, AZ headquartered company recently went public in the largest IPO for a homebuilder in at least two decades. It is well-recognized that successful timing is one of the most important aspects of an IPO, and Taylor Morrison finds itself in the catbird seat with an environment of rising home prices and steadily improving economy.

For the current quarter, investors will be looking to learn more about how Taylor Morrison plans to use its IPO proceeds of $628 million in order to grow its business.

Wall Street is optimistic about the seventh-largest homebuilder ahead of earnings. Analysts at Susquehanna Bank recently initiated coverage of Taylor Morrison with a “buy” rating and a $30 price target. Sterne Agee also initiated coverage with its own “buy” rating and a $29 price target.

Demand for homebuilding stocks has increased as home inventories are reaching record lows. The $628 million raised by Taylor Morrison is significantly higher than the $250 million it hoped to raise back in December, a sign of continued investor confidence in the sector. I expect shares to continue higher in the next 12 months.

Foolish Bottom Line

While the broader market appears fairly valued at 16x earnings, I believe Macy's, Nordstrom, and Taylor Morrison Home Corporation have plenty of upside based on strong fundamentals.

I would use any market pullback ahead of upcoming reports as a long-term buying opportunity.

Thanks for reading, and consider subscribing to my posts for more Foolish ideas on outperforming the market.

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John Macris 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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