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I am generally hesitant to use some type of filtering system to identify stocks during earnings season. There are several reasons for this, not the least of which is the manic nature of the markets, potentially either soaring or plummeting on earnings news, as Brian Nichols discussed in a recent article on Seeking Alpha (click here for article).

Consider Caterpillar Inc.’s (NYSE:CAT) results for a moment. The company missed analyst estimates, and shares dropped.

There are a couple of key take-aways from Caterpillar’s earnings report. For instance, economic growth in the US has been slower than the company had expected, and growth in China is slowing. In what is perhaps one of the most telling signs that investors have had unrealistic expectations for Caterpillar given the current macro environment, Nick Zieminski from Reuters reported that the company raised its full-year top and bottom line forecasts, but “the midpoint of its new range was below analysts' average estimate".

Caterpillar actually had a relatively solid quarter (profit up 30%). The company expects good things for the rest of the year, but those good things are still south of what analysts want. Understanding investor disappointment becomes easier when you consider that over at least the previous five quarters, the company has surpassed analyst earnings estimates, according to Reuters. If economic growth, both domestically and overseas, had been faster, than perhaps Caterpillar could have surprised analysts again.

Economic growth in the US will likely pick up a bit in the latter half of this year and into next year; the IMF expects GDP growth of 2.5% in 2011 and 2.7% in 2012. And even with growth easing in China, it is important to recognize that the pace will still be relatively solid. For example, the IMF is looking for China’s GDP to climb 9.6% this year and then “slow” to 9.5% next year. The substantial part of this is that the economic climate will likely be a bit more hospitable as this year winds down, than it was earlier in the year; next year should be relatively favorable, as well.

This dynamic sent me searching for companies that have some of Caterpillar’s more attractive characteristics. For instance, companies that have been doing relatively well, and analysts believe will continue to fare favorably going forward. Of course, the downside to this type of search is the potential to identify a company that mimics Caterpillar and fails to meet expectations, particularly if the economy sours. After all, investors would likely punish any company that falls short of expectations, but it seems that investors’ spirits have farther to fall if a company has a history of beating expectations, and then fails to even match them. That is, unfortunately, a risk.

Looking For Butterflies

We created a screen that highlights economically sensitive companies that have a recent history of beating earnings estimates. To accomplish this, we omit stocks in the non-cyclical and healthcare sectors. Then, we filter for companies that have reported actual EPS above analyst expectations in each of the last five quarters. We are less concerned with the magnitude of the surprise, than we are with just the fact there is an upside surprise.

Another factor with Caterpillar is that earnings estimates had been trending higher recently. So, we are going to need to highlight companies where analysts have become particularly bullish of late. To accomplish this, we filter for names where the current EPS estimate for this year is higher than it was a month ago, and the reading from a month ago is higher than the average estimate from two months ago. We go a step farther and also require that the estimate from two months ago is higher than it was three months ago. On Saturday, this left us with a list of 119 companies.

Caterpillar’s revenue growth over the trailing twelve months is faster than its industry average.

We take this into consideration in our screen as well, and filter for companies that also surpass their peers in the TTM period. This reduces our list to 82.

Industry-wide profit margins have improved. Not only has Caterpillar also seen its profit margins widen relative to its five-year average, but its margins are wider than the average of its peers. With that in mind, the next requirement in our screen is that a company’s operating margin be wider than its historical average and that it surpass its industry’s norm. At this point, we are left with 31 names.

The price tag is also important. Up to this point, we have been willing to tolerate loftier levels. After all, if a company has a history of beating estimates, and investors firmly believe that the company will continue to do so, they could push the stock price to a premium valuation. Value hunters may not be so accommodating. Further, CAT’s P/E is less than the industry average. So, we filter for companies that are priced at a discount to their peers. This leaves us with 18 companies for further review. Here is a quick look as some valuation metrics for the results of our search on Saturday:

Tech giant Apple Inc. (NASDAQ:AAPL) has been on a tear recently, significantly outperforming the S&P 500 Index, besting the benchmark by 14.5% over the last month and 15.6% over the last six months. Still, with a P/E of about 15.6 on TTM earnings, it is priced just below its industry average of 16.3. More importantly, though, is the valuation based on future earnings: Its PEG (forward P/E divided by the expected long-term EPS growth rate) ratio is 0.7, placing it well within the acceptable range for even more conservative value investors.

AutoZone, Inc. (NYSE:AZO) is a retailer of auto replacement parts. AZO shares have also fared well relative to the S&P 500 Index for much of the year, outperforming by 12.5%, though it has dragged a bit recently, lagging the index by about 4.6% over the last month. Its P/E ratio stands at about 16.4, which is considerably less than the 22 average of its industry. Value investors should find AZO’s a PEG ratio of just about 1.0 appealing.

Bed Bath & Beyond Inc. (NASDAQ:BBBY) is another retail company with a stock that has been generally doing well relative to the broader market this year, though it has faced some difficulty recently. BBBY beat the S&P 500 Index by 19.3% over the last six months, but has trailed the index by 0.5% over the last four weeks. With a P/E ratio of 18.2, relative to the industry norm of 22, and a PEG ratio of 0.98, BBBY could be appealing to value investors.

Shares of rail giant CSX Corporation (NYSE:CSX) have also lagged the broader market, falling behind the S&P 500 Index by 4.5% over the last four weeks. Still, it has fared well over a longer period, beating the S&P 500 Index by about 8% over the last six months. CSX has a P/E of 16.4 versus an industry average of 18.4. Although its PEG ratio of 1.2 might be out of range for die-hard value hunters, it is still reasonably priced for more flexible investors.

Discover Financial Services (NYSE:DFS) has also taken a bit of a hit recently, as its shares have trailed the S&P 500 Index by 1.3% over the last month. Over the last six months, however, it has outperformed the market by 22%. Its P/E is 7.5, less than the industry norm of 9, and it has a PEG ratio of 0.7.

Danaher Corporation (NYSE:DHR) is a diversified technology company with a stock that has outperformed the S&P 500 Index by about 6.8% over the last six months, but has lagged the index by 5.3% over the last month. Its P/E of 18.4 compares favorably with the industry average of more than 25, but its PEG ratio is 1.2, pricing it too high for the most conservative value investors.

Satellite entertainment company DISH Network Corp. (NASDAQ:DISH) has been outperforming the market lately, beating the S&P 500 Index by 43% over the last six months, including 8.3% in the last four weeks alone. Its P/E of 11 is well below the industry average of nearly 21, and its PEG ratio is just about 1.1. DISH is set to announce earnings on August 8.

W.W. Grainger, Inc. (NYSE:GWW) distributes facilities maintenance products, such as material handling equipment, safety and security supplies, and power tools. GWW shares have advanced more than 10% over the S&P 500 Index over the last six months, but have marginally trailed the index by 0.6% in the last month. It has a P/E of 18.5, slightly below the industry average of 19.9. But value investors might be turned away by GWW’s PEG ratio of 1.4.

Construction company Layne Christensen Company (NASDAQ:LAYN) focuses on two areas: water infrastructure and mineral exploration. Shares of LAYN may have lagged the market by 5.6% over the last six months, but it has been gaining ground more recently, edging ahead of the S&P 500 Index by 0.9% over the last month. In an industry with an average P/E of 36, LAYN’s valuation of 16.4 seems quite appealing. Yet, its PEG ratio is 1.8, which is somewhat lofty and raises concern about how much more room the stock might not have left to run.

The stock price of fastfood giant McDonald's Corporation (NYSE:MCD) has outperformed the S&P 500 Index over both the last month and trailing six months by 2.2% and 13.3%, respectively. Nonetheless, its P/E, at 17.9, is well below the industry average of 23.3. Yet, its shares do not necessarily appear on the value menu, as its PEG ratio is 1.7.

Two publishing companies appear on our list. The first is Meredith Corporation (NYSE:MDP), which is involved in, among other things, magazine publishing. MDP shares have significantly trailed the market, falling behind the S&P 500 Index by nearly 21% over the last six months and 9.5% in the last month, alone. It has a P/E of 10.3, relative to an industry average of 21; its PEG ratio is 1.1. Watch for a change in these metrics after the company announces earnings on Thursday, July 28.

The other publishing company is The McGraw-Hill Companies, Inc. (MHP). Unlike MDP, MHP has been trouncing the market, outperforming the S&P 500 Index by 11.9% over the last six months and 5.1% for the last month. Its P/E ratio is 16.1 and its PEG is 1.6. It, too, is announcing earnings on Thursday.

Nordson Corporation (NASDAQ:NDSN) is a diversified machinery company, focusing on equipment involved in precision dispensing, testing, and the like. Its shares have surpassed the S&P 500 Index by 2.9% in the last month and by 20% over the last six months. NDSN shares have a P/E of 17.5, relative to the industry reading of 21, and its PEG ratio is 1.2. The company reports earnings on August 18.

Despite lagging by 1.7% over the last month, shares of transportation company Old Dominion Freight Line (NASDAQ:ODFL) have outperformed the S&P 500 Index 13.7% over the past six months. Its P/E stands at 23.6, just a touch below the 24.5 average of its peers. Its PEG ratio, however, is 0.8, suggesting a price tag low enough to capture the attention of the most zealous value investors. Still, investors should be aware that the company is scheduled to release earnings on July 28.

As with AutoZone, O'Reilly Automotive, Inc. (NASDAQ:ORLY) is a retailer of auto replacement parts. Recent weakness in its stock price has caused ORLY to lag the S&P 500 Index over the last four weeks by 8.9%, reducing its longer-term relative outperformance to only 3.4% over the last six months. With a P/E ratio of about 21, ORLY is barely on sale relative to the industry reading of 22 and is much higher than AZO’s P/E of 16.4. Still, its PEG ratio is 1.1, within range for even some relative value investors, though more-conservative types might prefer AZO. The company is expected to announce earnings on Wednesday, July 27.

OYO Geospace Corporation (OYOG) is involved in manufacturing equipment used in seismic data collection and processing. Outperforming the market by 4.8% over the last four weeks has helped OYOG shares surpass the S&P 500 Index by 13.6% over the last six months. The stock’s P/E of 25 is marginally below the industry average of 26. (PEG is not available.) The company is slated to release earnings on August 5.

Wireless telecommunications company QUALCOMM, Inc. (NASDAQ:QCOM) has effectively performed in line with the market over the last four weeks, but has outpaced the S&P 500 Index 7.3% over the trailing six months. Its P/E, at just under 22, is marginally below the industry average, which is a touch above 22. It has a PEG ratio of 1.2, suggesting that it may have plenty of room to climb.

Lastly, shares of package delivery company United Parcel Service, Inc. (NYSE:UPS) have lagged the market lately, trailing the S&P 500 Index by 1.8% in the last month and 3.1% over the last six months. It seems to be priced with little room for improvement left, as its P/E is 19.4 relative to an industry reading of 19.7, and a PEG ratio of 1.5. Look for the company to release earnings on Tuesday, July 26.

Source: Using Caterpillar's Earnings to Identify Attractive Companies