The 21st century has produced a fractured, information-dense global economy that has prevented accurate predictions of market behavior. Macroeconomic forces around the world push the market as if it were a punch-drunk fighter. When China decided to let its currency—the yuan—float, markets all over the world tossed and tumbled for weeks. When fears spread that the federal deficits of Portugal, Italy, Ireland, Spain, and Greece (the PIIGS) were spiraling out of control, the markets plummeted—and then recovered as the rest of Europe, led by Germany, stepped in to bail them out.
To put it another way: When Shanghai sneezes, Wall Street catches a cold. When Berlin blinks, the Street rubs its eye.
For the trader, this means that the old rules no longer apply. The technical indicators you once depended on can’t keep up with today’s global markets. Fundamentals that once guided a company’s growth are not as dependable as they once were.
So what’s a trader to do? Determine which factors still matter; then use them to judge the growth potential of stocks.
Earnings, for example, still matter. In fact, earnings drive stock prices.
Finding “earnings busting” stocks, however, can be something of a minefield. It’s not just a case of looking for stocks with high earnings growth. You need a system. Without a system, you’re driven by your emotions. Let’s say a friend tells you that xyz stock doubled in price today. Sounds like a hot stock you should snag, right?
You need to find out why it doubled and whether that might be a repeatable event. Otherwise, you’re driven by emotion, which usually leads to trouble.
To take emotions out of the equation, you need a system that lets you compare one stock with another, on an “apples-to-apples” basis. When I look for Earnings Busters, I use three basic rules:
- The stock price must be in line with its earnings growth rates.
- The company growth ratio (CGR) must be reasonable.
- The company must have conservative (or at least not overly aggressive) accounting and governance policies.
In Part 2 of this article, I’ll show you the sources I use to find this data.
Here are 5 Earnings Busters to Trade Now
NOTE: All prices, ratios, and earnings data are current as of May 26, 2011.
1. GameStop Corp (GME) ($27.75)
GameStop is the largest video game and entertainment software retailer in the world, with almost 6,500 stores spread across the U.S. and 17 other countries. It ranks No. 255 on the Fortune 500. This year it acquired kongregate.com, whose 10 million members play online games for free.
Why GME is an Earnings Buster: GME’s earnings have grown at +36.8% per year over the past 5 years and are projected to continue at a milder pace of +11% per year over the next 5 years. Right now you can buy those earnings at a pretty good discount. The current P/E is 10.0, and the projected P/E is just 8.9. The price peaked in late 2008 at about $62; it is now selling for less than half of that, so it has a lot of room to grow. Its CGR is 1.24, and it is rated a Buy by Sabrient.
2. Trina Solar, Ltd. (TSL) ($22.02)
China’s targeted clean energy policies are positioning it to become a major player in the global renewable energy market, and Trina Solar is at the forefront of that effort. Headquartered in Changzhou, China, Trina Solar is the largest solar photovoltaic (PV) manufacturer in the world, marketing PV modules in Germany, Spain, Italy, the Netherlands, France, Belgium, and Southern California.
Why TSL is an Earnings Buster: Trina Solar has grown at +76.9% over the past 5 years, and it is projected to grow at +20% per year over the next 5 years. Based on this year’s earnings, its P/E is 5.3; based on next year’s earnings, the projected P/E is 5.9. The CRG is 3.38, which makes it an excellent buy considering the +20% projected growth rate. TSL is rated a Strong Buy by Sabrient.
3. Apple, Inc. (AAPL) ($335.00)
Apple is one of the companies that has changed the way we live. It was the growth stock of the 1980s, with the Apple II and the Mac. It began a new growth surge in 2001 with the introduction of the iPod, followed by the iTunes media browser, iPhone, and most recently iPad and Apple TV. The company has grown at about 50% per year for the past 5 years and is still growing.
Why AAPL is an Earnings Buster: Last year Apple’s earnings grew +52%. This year they’re expected to grow approximately +60%, with a current P/E of 16 and a projected P/E of 11.9. Apple is expected to grow at +20% a year over the next 5 years, which gives it a CGR of 1.77. Some analysts feel that Apple’s accounting is a bit on the aggressive side, but the stock comfortably meets all of our other criteria. AAPL is rated a Strong Buy by Sabrient.
4. Jazz Pharmaceuticals (JAZZ) ($27.90)
JAZZ develops prescription medicine for patients with psychiatric and neurological disorders. Its current products include Xyrem for the treatment of narcolepsy and LuvoxCR for the treatment of OCD. On May 3, JAZZ released its first quarter earnings for 2011: they were up 46% from their first quarter in 2010, bolstered by strong sales momentum from Xyrem.
Why JAZZ is an Earnings Buster: The company made its first earnings in 2010 of $1.50, which is +677% more than it made in 2009 (outrageous gains tend to appear when a company transitions from the red to the black). Expected earnings for 2011 are $3.02, which sends the expected growth rate to +94%. We’re paying 22 times this year’s estimated earnings, but assuming those earnings are achieved, the forward P/E is only 6.8. With a 5-year estimated growth rate of +14% per year, JAZZ has a solid CGR rating of 2.07. It is rated a Strong Buy by Sabrient.
5. Amtech Systems, Inc. (ASYS) ($21.65)
Amtech provides products and services to the semiconductor and solar industries, the latter establishing it as a player in the alternative energy field. A small-cap company, ASYS sells its products primarily in the United States, Asia, and Northern Europe.
Why ASYS is an Earnings Buster: Amtech’s 2011 earnings are expected to increase +134% from its 2010 earnings and are expected to grow +35% per year over the next five years. The current P/E is 9.4, and the forward P/E is 8.3, which is very good considering the projected earnings. ASYS has an outstanding CGR of 4.23, and its accounting practices are considered conservative. Sabrient rates ASYS a Strong Buy.
In Part II of this article I will provide details on my system for picking Earnings Busters and give you 5 more Earnings Busters to trade now.