5 Stocks That Could See Large Gains During The Next Month

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Includes: C, CAT, MCD, TPX, TZOO
by: Brian Nichols

The following stocks are each set to announce earnings during the month of October. Each stock's performance has been different over the last three months as economic fear spread. I believe the following stocks present a strong likelihood of exceeding expectations and posting significant gains over the next few weeks as earnings approach. Below is a look at five stocks that I expect to outperform the markets during the next month.

The chart below lists the five stocks, the company's earnings per share, its revenue, and its stock performance since last earnings report. The five stocks each have two EPS numbers located next to the column labeled tickers. The first set of EPS numbers are the estimated earnings for the upcoming quarter. The second set of EPS numbers show the company’s earnings during the same quarter in 2010. Next, there are two sets of revenue, with one showing the expected amount of revenue for the upcoming quarter and the other showing the previous year’s revenue during the same quarter. After revenue I have listed the percentage that analysts expect the company to either underperform or outperform in revenue year-over-year. I believe this statistic to be important because it shows the market expectations, but then it can be compared to the company’s stock performance since its previous earnings report which is the last column on the chart.

Ticker EPS Expectations EPS Prior Year Revenue Expectations Revenue Prior Year Expected Revenue Gain/Loss Stock Performance Since Last Earnings
TPX $0.85 $0.62 $369.2 million $295.78 million 24.80% (23%)
C $0.90 $0.70 $19,840 million $20,740 million (4.30%) (33.5%)
TZOO $0.35 $0.22 $38.38 million $27.69 million 38.6% (73%)
MCD $1.43 $1.29 $7,030 million $6,300 million 11.5% 4%
CAT $1.62 $1.22 $15,010 million $11,130 million 34.8% (30%)
Click to enlarge

Tempur-Pedic International (NYSE:TPX) is on pace to post one of its all-time best financial years. The stock has come a long way in the last three years as one of the largest gainers since January of 2009. In January of 2009 the stock was trading under $10 and just a few months ago the stock was trading at nearly $75. The reason for the large gains has been strong fundamental performance, which include an EPS of $2.71, an increase of 65% year-over-year. The stock has lost 23% of its value since announcing earnings in July. And I believe the stock’s potential to post large gains following earnings are likely, I also believe the stock will increase very quickly leading up to earnings with expectations being so high and the stock being so low.

Citigroup (NYSE:C) is an unusual stock for this particular list, since its growth does not match the intensity of the other stocks that I have chosen. However, the stock has trended significantly lower since announcing earnings in July, by 33%. And the stock’s price-to-earnings are incredibly low at 8.26, especially with such strong negativity surrounding the industry. Yet Citigroup has performed fairly well, despite its global presence, the mortgage crisis, high unemployment, and all other reasons that have given investors a pessimistic view of the major banks within this industry. I believe expectations are both fair and achievable for the company that released a strong quarter during Q2. If the company were to release strong earnings it could jump-start the industry and lead to large gains from other stocks such as JP Morgan (NYSE:JPM) and Bank of America (NYSE:BAC). And while I am much more bullish on regional banks, I believe Citigroup is among the best, with its emphasis on commercial banking. At a price under $30 I see little risk in the stock approaching earnings and while I believe it’s possible to purchase the stock under $25 within the next two weeks, I still believe that any price under $30 will prove to be a great purchase for the investor with long-term goals.

McDonald’s (NYSE:MCD) is the company and stock that keeps performing despite any crisis within the economy. The company continues to expand within emerging markets and reinvent itself with successful products such as its entire McCafe line of products. The company released an exceptional earnings report in July, and despite such strong losses within the major indices, this stock has gained more than 4% during the previous three months, creating all-time highs. The company is expected to increase revenue by $670 million, a gain of 11.5%, and I believe this will be easily surpassed as the company announced revenue gains of $1 billion during its previous quarter. In addition, the company owns many of its suppliers and has the ability to control a large portion of cost. Therefore, with increased revenue I expect EPS to increase by the same margins and easily exceed expectations, and for the stock to create new highs. I believe it’s likely that MCD reaches $100 after announcing earnings on October 21.

Travelzoo (NASDAQ:TZOO) is an interesting stock, it has lost more than 70% of its value since announcing earnings, which posted substantial year-over-year gains but did not meet expectations. I am not listing this stock because of its likelihood to exceed high expectations during its upcoming earnings report, but rather because of its future guidance. The company has expanded into new regions at a rate of about one in every three days and has positioned itself around the globe to experience long term success. I believe the stock’s loss is inappropriate considering its level of growth, yet, the company’s level of growth when it hit $100 a share was excessive and somewhat premature, making it overvalued. The stock lost a large portion of its value after earnings were slightly lower than expected but it’s also lost significantly more value as competition increases such as with Groupon (NASDAQ:GRPN), and with new competition such as powerhouse Google (NASDAQ:GOOG) expected to enter the business.
Yet Travelzoo is much different from any other company within the industry. Its business plan does not include offering the customer a $5 coupon at a local diner. But rather extensive packages at discount prices which may include airfare, meals, lodging and even an activity. Deals such as this take time to develop, but are highly successful, and based on the size of the company I believe it’s expanding and growing at the fastest possible rate. I do not believe the company is competing with Expedia, Google, Groupon, etc. because it’s global, and offers a variety of packages in some of the most populated areas of the world. The company has been successful in every region that it develops and I believe costs will decline, now that these new regions have been developed. I believe the company will continue growing and that the upcoming earnings report will reflect the growth and expansion that this company has achieved, and that guidance of more growth and higher revenue will be enough to impress investors as the trend changes for this company’s stock.

Caterpillar (NYSE:CAT) is a massive company with a market cap around $50 billion with more than $40 billion in revenue. The stock has lost more than 30% since it announced earnings in July. The loss has been a result of economic uncertainty and poor indicators regarding manufacturing and construction. However, the company has performed exceptionally well during these uncertain times with its last earnings report posting substantial year-over year gains. I believe the company’s earnings report will be strong, along with guidance, but I am unsure if it can exceed $15 billion in revenue. Regardless if it exceeds expectations it will post higher revenue and earnings along with being close to expectations. And at this point, I believe that investor's want assurance of the company, to know that it's still performing at a high level. Because there has been no reason, whatsoever, for this stock to trend so low and lose such a large portion of its value. I believe the upcoming earnings report will be successful in changing the trend of this stock and returning investors a portion of lost gains.

Disclosure: I am long MCD.

Additional disclosure: Statistics and earnings were obtained from either company reports or Google Finance. As with any investment, due diligence is required. The opinions in this article are not intended to be used to make a particular investment decision or follow a particular strategy.