Undervalued Stocks To Watch This Earnings Season: Part 1

 |  Includes: CNP, ETR, EXC, PPL, XEL
by: Brian Nichols

Over the last few years a large portion of my portfolio's gain has come as a result of earnings. Earnings have the potential to return both immediate gains and determine the trend of a stock for the next three months. I am a big believer that certain stocks should be purchased before and after earnings to return large gains in a short period of time. And because of the volatility within the markets over the last six months I believe that certain stocks are presenting great value with the potential to post significant gains both in the immediate future and over the next 12 months. As a result, I will be writing a 5 part series on stocks that are trading higher on momentum and stocks that have fallen by large margins with the potential to rise after earnings are announced.

The first industry is the most unlikely for this topic: utility stocks. As you may know, utility stocks were some of the best performing stocks during the last six months, but have pulled back over the last week as some of the most beaten down industries are trading higher. These stocks offer security and growth in a volatile market and I expect this sector to be one of the best performing within the market.

Last week I wrote an article that highlighted several utility stocks that I believe will trade much higher in 2012 because of an unstable global economy and valuations that are still far from the tops of its range. European leaders have already stated that 2012 will be similar to 2011 and with a presidential election just around the corner, politicians couldn't decide on where to order a hamburger much less budget cuts. Therefore the problems that plagued the markets in 2011 are still present which will limit the market's ability to trade off fundamentals. As a result I believe utility stocks will become the safe haven and trade much higher throughout 2012. If you look at the chart below you will see that the utility sector's P/E ratio is towards the bottom of its range over the 14 year period that is charted, which means their is significant room for additional growth, and because of fair weather conditions during this winter season I anticipate better than expected earnings from utility stocks.

Exelon (NYSE:EXC) is a next generation utility company that focuses on energy to improve the environment. The stock was negatively affected by the recession and has experienced a falling EPS during each of the last three years, despite the company meeting or beating bottom line expectations during each of the last 10 quarters. The company has a nationwide reach with strong positions in the Midwest and Mid-Atlantic. Exelon delivers electricity to approximately 5.4 million customers and 490,000 natural gas customers in the Philadelphia region. Some of its largest regions are in cold weather climates and sometimes have to endure significant power outages resulting in constant maintenance. As I said, the company met or beat expectations each of the last 10 quarters and I believe the weather conditions during this winter season will result in strong earnings and solid guidance. Usually, stocks such as EXC move very little following earnings but with uncertainty in the economy and a 5.11 yield I believe its earnings, on January 23, may result in the stock trending higher.

Centerpoint Energy (NYSE:CNP) has been one of the better performing utility stocks of the last year, with an annual return of 24% and a 4% yield to attract investors. However, it's also performed exceptionally well during its last three quarters, with each beating estimates including a 27% surprise during its last quarter over analysts expectations. The company has more than 5 million customers in six states, with more than half being natural gas. I believe the stock is well positioned for immediate gains, because despite its large gains in 2011 the stock trades at just 10.80x earnings, which is far below the sector's average. And because it's performed so well during its most recent quarters I believe its earnings will once again be strong, on February 23, and that it's presenting value for a long-term buy.

Entergy (NYSE:ETR) is primarily a nuclear based utility company and has met or beat expectations each of the last two years. The company provides service to approximately 2.7 million customers in four southern states. It's stock is trading near even over the last year and trades with a 4.64 yield. The company posted five years of year-over-year EPS growth, with the last 12 months growing by its largest margin. However, the stock has fallen 22% over the last five years and now trades at just 9x earnings, much below the sector's average. A few reasons for its fall include: nuclear disaster in Japan and increased pessimism regarding the usage of nuclear power; political pressure to abandon nuclear power; and several license expirations. However, in my opinion, these concerns are more precautionary and will not affect the company's earnings and since a stock's performance usually reflects fundamental progress, at some point, I expect this stock to trade higher in the immediate future. Since August the stock has traded particularly well and I believe it will continue trading higher following its quarter report on February 6.

PPL Corporation (NYSE:PPL) is an energy and utility holding company that operates in several states within the U.S. and in the U.K. The company's well diversified yet has a significant portion of its power that derives from coal-fired plants. The company's EPS has declined over the last year due to expenditures on environmental upgrades which will actually create more revenue in the long-run. Its revenue has increased over the last three years by 38% which is must faster than most utility companies. The top-line growth and optimistic future has been enough to allow for an 8% annual return, along with a 4.91 yield, and I believe it will trade much higher in 2012. The stock's trading at 10.80x earnings and has lost approximately 4% of its value since December 29. The company met or beat earnings expectations each of the last five quarters and because of lower costs I anticipate strong results on February 10 and for this stock to begin trending higher.

Xcel Energy (NYSE:XEL) is one of the more consistent utility stocks and has returned 15% over the last year along with a yield of 3.82. The company will announce earnings on February 2 and has met or beat expectations each of the last three quarters in 2011. The company returned impressive fundamental growth over the last three years and I expect additional growth in 2012. The company operates in 8 states with most being in the northern region. Therefore I believe the mild winter will have an impact on this company and allow for better than usual earning results when it releases the report on February 2.

It's very likely that these five companies will exceed earnings expectations, however I doubt that any of these stocks will post one day gains of 15%. Strong earnings can sometimes result in large gains the day of the announcement, yet utility stocks are long-term investments, not short-term gains. And I believe that when a utility company exceeds expectations it simply separates it from similar companies with high yield. Each of these companies could very well trade much higher in 2012 and can offer security to your portfolio, and at current prices I believe that each stock is presenting value and will trade much higher from its current price in 2012, because of significant growth and lower costs. On Wednesday we will look at several undervalued consumer good stocks with the potential for immediate gains following its earnings report, and will continue to look at other sectors throughout the week, and stocks that may trade higher during the immediate future following earnings.

Disclosure: I am long CNP.

Additional disclosure: Dates for quarterly results were obtained at Yahoo Finance and previous performance was obtained from CNBC. The company descriptions were obtained from both Reuters and company websites.