Wall-Street is a bit ridiculous sometimes (or most of the time). 'Earnings' are not really earnings at all. While GAAP standards are probably the best way we'll ever figure out how to account for a company's profits, they are not only flawed, but watched way too closely on a short-term basis. Traders, and even investors, are often unlikely to forgive a company for spending a significant portion of their income on capital expenditures (reinvestments), even though effective management can return 8, 10, or sometimes 15% on invested cash in the form of expenditures. True, the benefits won't be seen in accounting profits until the projects start generating returns, but the economic value of the company will have improved that much more.
A shareprice beating in your favorite stocks due to a miss in accounting profits, or a miss on revenue, should make you automatically think of buying more or initiating a position. Granted, a severe miss in earnings or top-line figures due to a real, long-term headwind that had been previously unaccounted for might mean it's time to sell, or that you should stay far away from buying. However, usually shares decline on unimportant and irrelevant news-- like guidance of 3 pennies lower, or revenue of only $6.02 billion compared to estimates of revenue for $6.093 billion.
Here are two great stocks that the market has put on sale for no good reason, other than less than perfect short-term earnings or a "disappointment" in guidance:
Comcast (CMCSA): Comcast is a massive company, employing over 100,000 people, and operating in several lucrative businesses. Below are some business highlights:
- Owns E!, Versus, CNBC, MSNBC, the Golf Channel, USA Network, and others
- Owns 10 local television stations which reach 27% of American Households
- Owns several Theme Parks (Universal Studios)
- Cable television, High-Speed Internet, and Phone services
- Owns Universal Pictures
Highlights from the company's 3rd quarter numbers:
- Video, voice, and data customer growth of 13%
- Business services has been one of their quickest growing segments, growing 39% over last year
- FCF growth of 36%
- EPS growth of 6% over last year
"This quarter's EPS growth was negatively impacted by a $256 million or $0.05 per share decline in investment income that was primarily driven by noncash mark-to-market adjustments in our investment portfolio." --- (This is why the company missed expectations)
Valuation, Management & Financials
- Enterprise value of $100 billion (compared to a market cap of $60 billion)
- Forward P/E of 12
- Return on Assets of 4.6%
- $12 billion in annual free cash flow
- Trading at 1.3 times book value
- Projected to grow at 14% annually over the next five years
Abercrombie and Fitch (ANF): Abercrombie and Fitch is a higher-end clothing retailer for men, women, and kids. Most of its customers are teenagers and young adults. Abercrombie got crushed after reporting that the trend of declining sales in Europe continued in the third quarter. Investors basically brushed aside the news that:
- International sales climbed 56%
- Comparable store sales increased 7%
- Net Sales were up 22% from 2010
- International sales jumped 64%
While ANF does not report earnings until next Wednesday, the sales figures were truly excellent. The European numbers, while important, should have certainly taken a backseat to the impressive international sales growth.
Valuation, Management, and Financials
- Trading at 12.5 times next year's earnings
- Return on Invested Capital of 10.4%
- PEG ratio of 1
- Quarterly earnings growth of 64%
- $540 million in cash, compared to $26.29 million in debt
- Roughly $6 in net cash per share
Abercrombie has a good business model for times like these: as an upper-end retailer, its consumers generally have higher disposable incomes than most. The company has been seeing solid domestic growth, and incredible international sales growth, even with declining European sales. For ANF to have sold off like it did, one may have thought it announced a loss for the quarter. Honestly-- 20% on slower European sales?
*Data sourced from Yahoo! Finance and Forbes.com
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
