At present, the Dow Jones Industrial Average has lost more than 560 points in the first half of September. There is a sense of panic with investors and fear of losing money which is causing high volatility and loss within the markets. With several indicators still left to be released and key events (Ben Bernanke speech, jobs bill, etc) that could determine the direction of the markets, investors may become increasingly pessimistic. However, we are entering another season of earnings, and I am very optimistic after Q2. I believe that Q3 earnings could be enough to stabilize the economy, assuming that company reports are still strong. Below is a look at several companies announcing earnings next week that I believe could offer a bright spot in a dull economy.
The chart below lists 10 stocks that could see gains after announcing earnings. The chart includes the date of earnings obtained from Google and Yahoo, along with expectations obtained from thestreet.com.
|Company||Ticker||P/E||Exp. EPS||Exp.growth rate||Date|
|Bed Bath & Beyond||BBBY||17.82||$0.84||19.57%||9/21|
|Red Hat, Inc.||RHT||65.47||$0.19||33.3%||9/21|
|Discover Financial Serv.||DFS||8.22||$0.84||79%||9/22|
|The Finish Line||FINL||15.23||$0.38||22%||9/23|
AutoZone is expected to release earnings at 10:00 AM on Tuesday September 20. The most noticeable number on the chart regarding AutoZone is its 23.10% expected growth rate year-over-year. This means thestreet.com expects the company to outperform earnings by 23.10%, which I believe the company will achieve. After last quarter's earnings report, the company had posted 10 consecutive quarters with EPS growth of more than 20%. Along with year-over-year success, the company has exceeded estimations in the last 5 quarters according to Reuters. Therefore, I have no reason to believe the company will not outperform earnings once again. The only issue has been revenue growth, which is growing but at a slow speed. The company believes that sales growth has decreased because of high gas prices and less disposable income. Despite this issue the company has managed to operate more efficiently and is now trading at all time highs, and I believe it's very likely the stock reaches new highs on Tuesday.
Oracle (ORCL) stock has been hammered as of late, losing more than 13% during the last 3 months. The company is expected to increase earnings by 13% year-over-year, and I am confident the company will succeed. Reuters show that Oracle has outperformed expectations in each of the last 5 quarters. The company has placed an emphasis on its emerging segments and experienced a slight increase in profit margins last quarter. I believe the company will continue to grow its software, new license, and product support, and should regain some of the loss experienced over the last 3 months.
Bed Bath & Beyond (BBBY) is one of the tricky stocks of the bunch. The company announced earnings last quarter that blew away expectations along with increasing guidance for Q2 with EPS between $0.77 - $0.82. Analysts are expecting the company to beat guidance with $0.84, but after the company has already increased guidance, I am somewhat pessimistic if it can outperform by 20% in this economy. The company has exceeded expectations 3 of the last 5 quarters and met expectations during the remaining quarters. The stock is trading at all time highs, and I believe investors are expecting the company to outperform its expectations. However, the company should announce earnings on the high end of estimates and has been very consistent at increasing revenue, so I believe the stock will maintain or may trend slightly higher. It's very possible for the company to outperform, and if so the stock should post large gains.
General Mills (GIS) is expected to post EPS of $0.62, a loss of 2.68% year-over-year. The company has met guidance each of the last 5 quarters according to Reuters. Therefore, I expect the company to meet expectations once again, and I believe the stock is trading in a position to see gains. Investors are pessimistic of GIS and its chances to outperform earnings after recent reports from Hormel Foods and Campbell Soup Company. General Mills traded lower after earnings were released from these two companies. Investors are worried about earnings, and the stock has been trending lower in the last few days as the company approaches its earnings report. I believe the company will meet expectations since it's demonstrated a level of consistency by meeting estimates each of the last 5 quarters. I then expect the stock to rise, as I think meeting expectations will be enough to prompt the stock to rise.
Red Hat (RHT) has a much higher risk attached to its earnings with expectations so high. The company has easily exceeded expectations in the last two quarters as the company continues to grow. The stock has lost 17% since July 7 with the economy having a large impact on its stock. Based on its past performance I believe the stock will exceed expectations and could see very large gains, but if the stock were to miss it could easily drop another 15%. Investors that decide to hold through earnings are taking a chance, but I believe the odds are greater that we'll see gains because of its past record of exceeding estimates.
CarMax (KMX) is trading near the middle of its 52 week range after losing more than 20% of its value since July 7. CarMax has now found a steady range over the last 3 weeks, which leads me to believe the stock is now presenting an opportunity. Thestreet is only expecting CarMax to post year-over-year gains of 6.42% despite the company posting gains of 25% in profit last quarter, a result of strong auto sales. I believe that a 6.42% estimated gain is very low considering the high sales reported from the auto manufactures. Considering that CarMax is one of the largest dealers, I expect the company to easily exceed this modest expectation and trend higher upon earnings being released.
Discover Financial Services (DFS) is on pace to post a record year in 2011. Analysts believe this as well since Thestreet is expecting an EPS gain of 79%. I expect the company to significantly outperform expectations with an EPS over $1.00. It would be an incredible gain, but so have the first two quarters of 2011, and I see no reason why the company cannot increase margins by the same level. The stock has managed to perform substantially well despite being traded in the struggling financial sector. Investors are optimistic regarding this company, and if it exceeds expectations it could have a major impact on the financial sector.
Nike (NKE) posted last quarter EPS gains of 17% and is expected to announce an increase of 6.26% for Q1 on September 22. The company grew revenue by 14%, led by North America and China. The company's growth in China leads me to believe that Nike has the potential to outperform expectations. The stock has lost more than 6% since July 7, which I expect to recover when the company announces its earnings report on Thursday.
Finish Line (FINL) is expected to outperform EPS by 22% year-over-year according to thestreet.com. Finish Line has met expectations in the last 3 quarters, so I find it reasonable to believe the stock is more than capable of meeting expectations once again. The stock was trading near all time highs before the downtrend in the market. Therefore, I believe that with strong earnings this stock could easily recover and continue its trend to new highs. Finish Line appears to be a good long term investment along with presenting a possibility to post short term gains. The company has no long term debt, has consistently increased its dividend over the last 3 years, and has improved profit margins since 2008. The company operates efficiently and is not dependent on debt or the financial industry to expand into new locations. This company could very well post record full year earnings and is setting itself up for future growth which is why I believe this stock could make both a good short and long term investment.
During the last two months the markets have trended lower on global events and economic indicators with speculation that the economy is getting worse. Economic Indicators are useful to determine the trend of the overall markets but earnings are what ultimately drive the markets. I believe this upcoming earnings season is critical, and could provide incredible gains or a significant amount of loss. The 10 companies that I have outlined should give us an indication of what direction the markets may trend during the immediate future.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in NKE, FINL, AZO, RHT, ORCL over the next 72 hours.