2 Techs, 2 Banks And 1 Drug To Buy Ahead Of Earnings

by: Richard Saintvilus

By Richard Saintvilus

With earnings season officially underway after the solid first-quarter report from aluminum giant Alcoa (NYSE:AA), investors are feeling a bit more optimistic about the state of the U.S. economy and what may lie ahead. The Street is starting to get the sense that corporate earnings are on the rise and the bearish tenor that the market has seen last week just may be overdone. As such, here are a few stocks that will be reporting earnings to keep on your radar.

Wells Fargo (NYSE:WFC) - Target $40

Wells Fargo will be the first of the major banks to report this Friday, April 12, before market opens. There's cautious optimism with what the bank may report. Plus it seems that the analyst community has mixed expectations with the bank's recent performance. Granted, Wells Fargo's fourth-quarter results were not up to its usual standards. But relative to expectations it wasn't all that bad.

What's more, the performance extended a streak that is now 11 consecutive quarters of profit growth - posting $5.1 billion. Not only was this a company record, but it also represented year-over-year increase of 24%. The bank consistently demonstrates solid execution and leverage. Unlike most rivals, management has figured out ways to produce meaningful returns in both assets and its investments.

Management has been able to do this despite prolonged weakness in interest rates. What's more, the bank continues to benefit from a business that is unburdened from unfavorable risk. The fact that it has limited exposure abroad is also a good positive, which minimizes impact from European fiscal concerns. From that standpoint, Wells Fargo meets all of the requirements.

Besides, the stock is trading at a considerable discount. Investors should expect gains of 20% as the stock should reach $40 fairly quickly. Finally, while most banks tend to fall within the same category and thereby appraised on similar standards and metrics, it is clear that Wells is out to set itself apart from the rest. There's a premium placed for banks with above-average growth prospects that still meets certain criteria of safety.

JPMorgan Chase (NYSE:JPM) - Target $55

Next on the list is JPMorgan Chase, which is coming off an excellent fourth quarter where the company surprised the Street by posting net income of $5.7 billion or $1.39 per share, which compared favorably to the $3.7 billion or 90 cents per share in the year-ago quarter - EPS surged 54%. Mortgage banking remained solid with loan originations rising by 33% to $51.3 billion.

Investors can see that JPMorgan has a strong business and a solid franchise in investment banking, mortgages and retail banking. Still, one can't discuss JPMorgan today without mentioning the embarrassing London Whale trade, which cost the bank not only more than $6 billion, but JPMorgan also lost its reputation of being the "cleanest shirt in the dirty hamper."

Still, management deserved credit for having acted quickly to mitigate the damage. For some investors however, JPMorgan's recovery has appeared too slow. Consequently, the stock has not traded on fundamentals and remains undervalued by (at least) 20%. If the bank can continue to produce solid return on equity in the low to mid single digits (12.5%) the stock should reach $55.

Add the potential for share buybacks over the next several quarters and an improving balance sheet, coupled with a discount rate of 9.5%, a case can be made that fair value on the stock could approach $58 to $60. This stock may still be the cheapest bank on the market.

Intel (NASDAQ:INTC) - Target $25

Semiconductor giant Intel will report earnings on April 16. I've spent most of last year defending the company. This is even though I no longer hold the stock. Despite the fact that Intel dropped the ball on the mobile craze and underestimated the swift decline of the PC industry, there's still plenty to like with this company. And if fourth quarter earnings were any indication, more gains are on the way.

For the fourth quarter, Intel posted revenues of $13.477 billion. While this arrived at the midpoint of management's prior guidance, it was 40 basis points lower than estimates. In other words, Intel missed Street's revenue target by less than 1%. Despite the 3% decline in sales, this should qualify as a win - considering the battles the company has had to work with.

In addition, with EPS coming in at 48 cents, Intel beat Street estimates by 3 cents - helped (among other things) by an aggressive share buyback program, which reduced the share count during the quarter by almost 3% to 5.095 billion shares. What's more, things are beginning to fall in place. According to TechCrunch, investors should expect LTE-compatible chips from Intel at some point this year.

These will allow Intel to power more smartphones and seek more growth opportunities in tablets. During the conference call, the company announced plans to make its next generation tablet SoC (system on chip) codenamed "Bay Trail" available to Google's Android platform in addition to Windows. The company is not out of the woods yet. But Intel is no longer the laggard, either.

While it's still fighting the likes of Qualcomm (NASDAQ:QCOM), the mobile devices market is still growing. And the Intel's R&D investments say that it plans to be a thorn in the side of many rivals. With continued improvements, this stock should reach $25 by the second half of the year.

Yahoo (NASDAQ:YHOO) - Target $28

Despite what bears may want to believe, there is still life at Yahoo, especially since Marissa Mayer has taken over. The stock is currently sitting at a new 52-week high, and with a P/E of 7, Yahoo remains one of the most attractive media companies on the market.

The company will report earnings on April 16, and the Street expects Yahoo, which has gone under an impressive redesign/reorganization of its web assets, to build upon a solid fourth-quarter report, during which, gross revenue rose almost 2% year-over-year. While that's not a robust number, it also represented a 12% surge sequentially, with net revenue improving 5 and 12%, respectively.

Investors that are still impatient have to realize that's the best growth this company has shown in almost four years. Granted, profitability wasn't stellar, but relative to expectations, Yahoo managed to erase concerns about leverage as gross margin and operating income improved sequentially by two-and-a-half points and 25% respectively.

As with Intel, Yahoo is far from a flawless company. But I also understand that the company had not shown real progress until Marisa Mayer arrived. Granted, it has been a while since Yahoo really made a splash on the market. However, changing a corporate culture and fundamentally repositioning a company does not happen overnight. With continued progress this stock remains one that should outperform for the rest of the year.

Johnson & Johnson (NYSE:JNJ) - Target $90

It's hard to imagine that there was a point when I felt Johnson & Johnson was too big to succeed. Yet, it has been the company's acquisition of Synthes, that's compelled me to take a different view of what this Big Pharma kingpin can still become. Shares are up more than 17% so far this year, and investors are wondering how far the stock can go.

Although JNJ appears rejuvenated, some still question whether management can hold its momentum, especially since it appeared that JNJ's organic growth has slowed. Nevertheless, the company deserves credit for seeing an opportunity in Synthes that is now contributing to its bottom line. Fourth-quarter operating earnings grew 8% as reported. Likewise, net income arrived at $2.6 billion, or $0.91 per share.

While, earnings arrived significantly above the $218 million JNJ earned last year, as noted, the Q4 2012 results included a $3 billion charge. However, when removing special items fourth-quarter earnings arrived at $1.19 per share -- topping Street estimates of $1.17. Plus there are many more growth catalysts on the way.

The company is also well diversified from the standpoint that only one of its drugs (Remicade), which is growing at a 5% rate, accounts for more than 10% of the company's revenue. What's more, JNJ's new cancer drug, Zytiga, which posted 74% revenue growth in the fourth quarter, continues to gain incredible traction. While the stock is not cheap at a P/E of 21, shares should continue to rise as long as management continues to improve margins and the medical devices business.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: SaintsSense is a team of financial writers. This article was written by Richard Saintvilus, the founder of SaintsSense. 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.