Seeking Alpha
Long/short equity, growth, medium-term horizon, registered investment advisor
Profile| Send Message|
( followers)  

Debate is raging whether a bottom has been put in or if more pain is ahead, but if history rhymes odds suggest stocks will finish April higher than they began February.

If that's the case, considering companies that have already reported earnings beats that also offer strong historical seasonality may make for a winning combination. Here are three basic materials companies, Core Labs (NYSE:CLB), Eastman Chemical (NYSE:EMN), and Ashland (NYSE:ASH) that may trade higher into spring.

Trickling down

Major markets have a solid history of rewarding investors rather than punishing them through spring. The S&P 500 ETF (NYSEARCA:SPY) has traded up in eight of the past 10 years from the start of February through the end of April. During the period, investors have been rewarded with an average and median return of 4.27% and 4.94%, respectively. Interestingly, the SPY even posted gains during the financial collapse for the period. If that trend holds true, it could make the path higher for basic materials companies smoother.

(click to enlarge)

Source: Seasonal Investor Database

The basic materials ETF (NYSEARCA:XLB) hasn't had as good a run as the SPY over the next three months, but results have been solid. The XLB has gained 5.74% on average and has only traded lower once -- in 2012 -- in the past eight years. That may suggest solid tailwinds for the industry again in 2014.

(click to enlarge)

Source: Seasonal Investor Database

1. Core Labs

The massive investment being made by the oil and gas industry has been a boon to Core Labs, driving demand for its sophisticated mapping, production, and reservoir management technology. The company's shares have notched gains in all 10 of the past 10 years, returning an impressive average and median 21.1% and 18.85% through April, respectively. Core won't be confused with a value stock given it's trading at nearly 25 times forward earnings and sports a PEG ratio of over 1.5. However, the company has a solid track record of surprising investors with better-than-hoped earnings. In the last year, results have outpaced analyst estimates three times, including the most recent quarter during which Core posted record sales and earnings. Sales were up 11% year-over-year to $273 million in the quarter, and earnings grew more quickly, increasing 20% from a year ago. Results were led by an 18% lift in sales of Core's production enhancement offering, which helps oil companies get the most out of tough-to-pump wells. Importantly, free cash flow surged 55% to an all-time high of $65 million, giving the board enough confidence to boost its dividend 56% to $0.50 per quarter for 2014.

(click to enlarge)

Source: Seasonal Investor Database

2. Eastman Chemical

Eastman's stellar track record for gains heading into spring took a detour last year, when shares retreated nearly 6% for the period ending April. However, the company still has an impressive 10-year track record for shareholder gains, increasing nine times and returning a median 14.39% and 12.87%, respectively. Eastman trades at a much friendlier 10 times forward earnings, and it has a PEG ratio of 1.18. Over the past year, the company has over-delivered on earnings each of the past four quarters, including an 8% beat in Q4. However, that track record could be at risk over worries higher propane prices could weigh down profit. Analysts cut their earnings outlook to $7.63 per share from $7.73 per share for 2015 on those concerns. That said, sales came in at $9.3 billion last year, up from $8.1 billion in 2012, and they improved to $2.26 billion from $2.17 billion last year in the fourth quarter. A good portion of that growth came thanks to construction demand for solvents, suggesting construction spending could help support sales this year too.

(click to enlarge)

Source: Seasonal Investor Database

3. Ashland, Inc.

Ashland has also put up solid performance through April. Shares have headed higher in nine of the past 10 years, producing a median 8% return. Investors are paying roughly 12 times earnings to own shares and Ashland's PEG ratio is 1.3. Like Core and Eastman, Ashland has done a nice job of outpacing analyst forecasts, beating in three of the past four quarters, including an 8.4% outperformance in Q4. Sales totaled $1.9 billion in the quarter as volume grew 3%, offsetting price pressure. Cost-cutting measures as part of its ongoing restructuring helped operating income climb 10% to $179 million -- not bad for what is typically the company's weakest quarter. On the heels of that performance, Ashland hopes volume will continue to grow for its adhesives business, which benefits from housing and auto demand, and coatings business. Across products geared toward those industries, volume climbed 13% in the quarter from a year ago. As for future earnings, Ashland thinks its latest re-alignment will save it $150-200 million in expenses annually, adding support for future earnings upside.

(click to enlarge)

Source: Seasonal Investor Database

Across all three companies, demand for products remains tied to global industrial production growth. If the U.S. economy can keep improving, Europe turns up off its lows, and emerging markets can re-ignite, demand will help all three post solid results this year. Of the three, Core's technology focus provides a bit more insulation against seasonal commodity ups and downs, while Eastman and Ashland are a bit more heavily tied to global GDP. Regardless, with earnings already reported and strong seasonal tailwinds, the three may make a nice addition to portfolios.

Source: 3 Basic Materials Stocks That Beat On Earnings And May Offer Upside Into Spring