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Summary

  • Positive earnings surprises can drive up share prices significantly.
  • One indicator that shares may be undervalued relative to earnings is an EPS/Price mismatch.
  • Another indicator that shares may be undervalued is significant short covering.

Earnings season is well underway, and the results, for the most part, have been positive. Several companies within the financial sector beat earnings estimates last week, and Benzinga reports that big-name firms including Apple (NASDAQ:AAPL), Boeing (NYSE:BA), Facebook (NASDAQ:FB), and McDonald's (NYSE:MCD) are expected to continue the trend over the coming days.

Earnings estimates play an important role in these announcements, giving investors a gauge of how the market expects companies to perform. Analysts make quarterly and full-year earnings estimates for stocks, and they raise or lower these figures depending on company developments, industry news, and other information that can influence performance. Better-than-expected earnings often send a stock up as they did for Intel (NASDAQ:INTC) last week. The chipmaker rose to a 52-week high after reporting second-quarter earnings of $0.55 a share on $13.8 billion in sales, beating the average estimate of $0.52 a share and $13.7 billion in revenue.

We decided to run a screen with this in mind. To begin, we created a universe of undervalued stocks as indicated by an EPS/price mismatch​. When stocks' earnings estimates rise, you might assume that share prices would follow suit with a proportional increase. However, if that doesn't happen and the increase in EPS is greater than the change in price, the stocks may be mispriced and undervalued.

For this screen, we used the latest average analyst earnings estimate for full-year EPS and compared it to the estimate from 30 days earlier. After that, we compared changes in stock prices over the same period.

We then ran another screen that involves people changing their perception of a stock's future, looking for stocks with significant increases in short covering. This means that short sellers, who benefit from a decline in a stock's share price, have decreased the number of shares shorted because they believe there's more upside potential in store for the stock. We limited our screen to stocks with a month-over-month decrease in shares shorted of at least 2% of the float.

Click here for the full, interactive chart.

1. Beazer Homes USA Inc. (BZH, Kapitall snapshot): Designs, builds, and sells single-family and multi-family homes in the United States. Market cap at $507.15M, most recent closing price at $18.98.

Shares shorted have decreased from 5.58M to 4.79M over the last month, a decrease which represents about 3.63% of the company's float of 21.74M shares. Days to cover ratio at 9.54 days.

The EPS estimate for the company's current year increased from $0.16 to $0.19 over the last 30 days, an increase of 18.75%. This increase came during a time when the stock price changed by 0.16% (from $19.26 to $19.29 over the last 30 days).

Beazer Homes will report its third-quarter earnings on Friday, July 31st. The company expects its full-year earnings to

2. KB Home (KBH, Kapitall snapshot): Operates as a homebuilding and financial services company in the United States. Market cap at $1.63B, most recent closing price at $17.80.

Shares shorted have decreased from 19.86M to 16.85M over the last month, a decrease which represents about 3.97% of the company's float of 75.80M shares. Days to cover ratio at 4.95 days.

The EPS estimate for the company's current year increased from $1.16 to $1.28 over the last 30 days, an increase of 10.34%. This increase came during a time when the stock price changed by 4.33% (from $16.85 to $17.58 over the last 30 days).

KB Home is expected to report its third-quarter earnings between Monday, September 22nd, and Friday, September 26th.

Source: Analysts Raised Their Earnings Estimates For These Undervalued Stocks