Top Companies To Own During Earnings Season

by: David Ristau

It is time again for quarterly earnings for the market, and the big reports start next week. This earnings season will be pretty interesting as the holiday season converges with the fiscal cliff. The cliff may have hurt some businesses, but the holiday season appears to have been strong for some retailers.

The Oxen Group believes that the best way to approach this quarter as well as all other quarters is look for opportunities that combine both high growth levels with undervaluation and a history of positive results.

Our approach to determine the best investments for quarterly earnings is to combine both a growth assessment ranking score with a value ranking score along with historical results. Each score assesses each company's fundamental value in growth and as a value investment given a number of indicators and ratios.

We believe that it is important to combine both because some companies looking at amazing quarterly growth are heavily overvalued or have already priced in their earnings. On the other hand, many undervalued companies are undervalued because they lack the growth capabilities to have significant impacts on their valuation.

The key to this quarter for us was to look at companies that have high-growth but show less risk with lower beta and less chance of them missing those estimates. Further, we wanted to avoid a lot of companies that would have exposure to significant amounts of commodity price increases as well as exposure to currency problems.

The top sectors for the quarter appear to be financials, online retailers, and residential construction companies.

The following report will report on our Top Five Picks for Q1, Top Five Large-Cap Picks, Top Five Mid-Cap Picks, Top Five Small-Cap Picks, and more.

It is important to remember that these picks are ideas about stocks performance into earnings and as they appear at the present. Many of these picks will perform well before their earnings selections, and these ideas are not earnings trades. Rather, these are companies that can perform well during earnings season as a whole.

1. Cirrus Logic (NASDAQ:CRUS)

Cirrus Logic is our top pick for earnings this season as we think the stock is ready to make a great comeback into and out of these earnings. First off, CRUS is looking to see about 225% growth in earnings along with over 130% growth in revenue. The full year of 2013 will see over 28% growth in revenue along 13% growth in earnings.

On top of awesome growth, the company has excellent value as well. The company has a future PE at 8, which is a great value level for a strong growth stock. Doing some quick math, we can see where CRUS can move into and out of earnings. The current PE of the stock is around 19. The TTM EPS is 1.79. The EPS is expected to grow 0.98 year/year. If CRUS were expected to maintain a 19 PE, the company's stock price would need to jump to $52 per share. Now, we have no intention that the stock can jump to this level. Even to maintain a modest 15 PE, CRUS stock will have to soar to $42.

Can the stock fundamentally back such a jump? The stock has made a significant pullback from the summer when the stock was trading in the mid-40s due to the company nothing that its March quarter would see weak revenue growth for the company. Shares fell over 30% from that news and then continued to drop on the back of the fiscal worries to end the year. Now, the cliff is over and the revenue worries have been priced in. We believe CRUS is still a very strong stock with lots of potential and is definitely showing a great entry prior to earnings with such great value.

2. JPMorgan Chase (NYSE:JPM)

JPMorgan Chase has made quite a move into its earnings report due out next week, and we do not expect much in the way of more upside before earnings. Yet, we do expect JPM to make a solid move post-earnings as the company still has a lot of value for the entire year. Currently, JPM has a PE below 10 along with future PE at 8.5. Both of those numbers show significant discount when the average PE for money center bank is 11.5. JPM trails the average, but we believe that a solid report will do wonders for JPM.

For financials, the companies as a whole are under wraps as it still has been limited in revenue growth over the past several years, and this quarter could have been marred by the fiscal cliff situation. Therefore, JPM still has tons of potential to move higher.

Will it though?

Sterne Agee believes so commenting that the company has seen improved performance in large and middle market lending as well as improving credit quality. The company is making revenue again because JPM is lending money again, which is the key to JP Morgan's success.

If the company is to maintain even a 9.5 PE through earnings, the stock will have to grow to at least $48 as TTM EPS will grow by 0.30. To get back to industry average, JPM should see stock growth to $57.5 (11.5 x 5.00 EPS). All in all, things look very solid for JPM.

3. DR Horton (NYSE:DHI)

Residential construction companies for the most part are overvalued at current levels. DHI, however, is different. The company only has a 7+ PE right now, which is quite cheap. The company, additionally, is expected to show 25% growth in revenue along with 55% growth in earnings this quarter. Those numbers alone should pique our interest.

Housing stocks have been making a nice recovery as demand has come back and the short supply of new homes on the market has finally allowed builders to find the sweet spot between price and supply. Right now, DHI looks good to build into its Jan23 earnings and beyond. Homebuilders have been showing growth, promising backlog increases, and good interest. Yet, can DHI be the same as its competitors.

Among its competition, DHI is one of the best value plays to have for earnings growth in the sector as current PE has jumped to 14. The company's last report was very promising and should show some definite potential for this report.

The past quarter showed homes closed rise 12% while the backlog grew 49%. That strong backlog means that DHI can see extended upside movement in sales for a while now. One issue to worry about the backlog is that its not closed. With a fiscal cliff looming during much of the latest quarter, we are a little bit worried about that negative impact.

If DHI can gain proper pricing at around 14 PE with TTM EPS at 2.79…the stock should be worth well over $35 per share. DHI represents true value and growth.

4. Sirius XM Radio (NASDAQ:SIRI)

We do not often get excited about sub-$5 stocks, but Sirius XM looks ready to have a big year. First off, the company is expected to see about 10-12% growth in sales this year and continue to increase subscribers. The company's initiative to get into automobiles and get trial subscribers has been very helpful in increasing its usership. We believe that trend will continue to be successful for the company as it moves into more vehicles. SIRI just recently signed a deal with Toyota to be in its cars, which will be a great addition as TM is the world's largest automobile company by sales.

The company is expecting to add another 1.5M subscribers in 2013 from its 2M addition in 2012. Further, the company may be doing a share buyback plan in 2013 as well, which is a big deal. It has over 5B shares right now, which is holding back its ability to increase equity value.

The company preannounced a lot of results for 2012, so the mystery over its Feb4 report is out of the way, but we believe the report will be a buy point. SIRI is expected to report 15% jump in revenue as well as 100% increase in EPS. Earnings are really not crucial right now as the company is still developing for the future.

SIRI is in a great technical upward channel. Look for it to continue higher from here to around $3.50 post-earnings and $4 by the end of February. The future of radio appears to be satellite, and SIRI is the leader here.

5. United Therapeutics (NASDAQ:UTHR)

United Therapeutics looks to be a great "under-the-radar" growth stock as it has strong growth with solid value. The company is benefiting from its hypertension drugs that it is has brought onto the market with over 20% revenue growth in 2012, and UTHR is expecting to see about 60% EPS growth along with 20% revenue growth in Q4FY12. The company is expected to see another 10% growth in revenue in 2013.

The company saw a major setback before its last report when its tablet form of hypertension treatment got rejected. The rejection was definitely a setback. The stock corrected over 20%, but then announced very slid earnings to end the month of October. The stock has now recovered, and the company looks very solid to push higher. With a 10.5 PE, the company is definitely strongly discounted. Even to maintain a 10.5 PE, the company will have to see growth to around $56 per share. We configure that by taking TTM EPS of 4.86 + 0.49 expected increase EPS multiplied by current PE. That calculation shows a strong discount in shares. We believe a push to $56 is definitely possible into and out of earnings.

The stock is consolidating right now, and it should see a push as we near earnings. The company, further, has limited risk with no FDA expected news before earnings. 2013 guidance will be key to the earnings, as we will want to see what the company says about its tablet drug expectations to try and get it approved. Other than that, growth mode is on!

Top Large Cap Picks:

JPMorgan Chase, Capital One (NYSE:COF), Express Scripts (NYSE:EXPR), Sirius XM, and Bunge (NYSE:BG)

Top Mid Cap Picks:

Noble (NYSE:NE), CVR Energy (NYSE:CVI), Rockwood (NYSE:ROC), DR Horton, and United Therapeutics

Top Small Cap Picks:

Cirrus Logic, Acacia Research (NASDAQ:ACTG), Titan (NYSE:TWI), MasTec (NYSE:MTZ), and Questcor (QCOR)

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The Oxen Group is a team of analysts. This article was written by David Ristau, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.