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.
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 am writing a series on stocks that are trading higher on momentum or stocks that have fallen by large margins with the potential to rise after earnings are announced.
During part 1, we looked at the most unlikely of stocks, utilities, with earnings that could determine a trend. In part 2 we will be looking at stocks that have the potential to post very large gains following earnings. The stocks I will discuss each have superb records at beating or meeting expectations and I believe that each are perfectly positioned to post large gains.
The consumer industries have traded much differently over the last 6 months; with cyclical being one of the biggest losers and non-cyclical being one of the best performers during the same period. Therefore, the following stocks have traded in various patterns, but are each presenting opportunity in the event of strong quarterly results.
Green Mountain Coffee Roasters (GMCR) has been one of the most fundamentally productive companies in the market over the last five years. During its most recent quarter, the company increased revenue by 90% and earnings by 180% year-over-year yet the stock traded lower. At the time, the stock was trading with pessimism after rumors regarding its accounting practices, and questions surrounding its supply. And although the quarter was remarkable, it was still slightly below what some were expecting. As a result of these factors the stock has lost 50% of its value over the last three months.
The company is scheduled to announce earnings on January 30, and it will determine the immediate trend of this stock. The company's expectations are quite high; however, its expectations have been high for the last two years, and the company continues to grow and post impressive quarterly results. I'll be interested to see how the stock performs following earnings, because last quarter when the company announced earnings I believed it had already lost with all of the rumors surrounding the company. I don't think it would have mattered what numbers the company announced; I believe it would have trended lower. The perception is now changing and GMCR has lost some of its spotlight, and if the company can announce solid earnings and beat expectations of $0.36, which I think it will, then I anticipate strong gains.
General Motors (GM) is expected to post an EPS of $0.44 when it announces earnings on February 20. The company's beat expectations during each of the last three earning reports, and I see no reason why it can't achieve this task once again. The auto industry has been one of the most fundamentally improved industries in the market with sales that are consistently higher on a month-over-month basis. The only problem is that GM has experienced some problems during its most recent quarters and unexpected expenditures such as problems with its batteries in the Volt which cost money to fix.
Despite problems during the last three months of 2011 GM still had high year-over-year sales and are showing all the signs of an improving company. So far in 2012, auto stocks are outperforming the market and a large reason is because of how undervalued these stocks are priced. I believe the first quarter of 2012 is a time of correction in the market and this stock is very cheap. Therefore, I anticipate very large gains in the month of January and then modest gains in February up until after its earnings report, which I believe will exceed expectations.
In late December I predicted that the Goodyear Tire & Rubber Company (GT) would be one of the best performers in 2012 and with a 12% gain since my call the prediction is getting off to a fast start. My optimism surrounding GT is a result of the auto industry, which is my favorite in 2012, and the undervalued price of the stocks associated with the growing industry. The company manufactures rubber products for the auto industry, along with tires for several of the best-selling vehicles. With a forward P/E ratio of just 6.16, I believe this stock will post huge gains throughout 2012.
A large contributor to gains will be earnings in which the company has performed particularly well during the last three quarters, beating expectations by a large margin. The company's expected EPS for its upcoming report is $0.31, and because of strong growth within the industry, I believe the company will easily exceed these expectations and trade much higher.
Harley Davidson (HOG) has beat expectations during two of the last three quarters, including its most recent. In October, the company beat expectations, yet traded much lower, only to recover and trade higher in the following days. The company is now scheduled to announce earnings on January 24, and I don't believe the market is volatile enough to cause the stock to fall if earnings are strong. HOG continues to trade around $40, and I believe this level will be left behind after the company announces earnings. The company is moving in the right direction with strong overseas demand, higher demand in the U.S., low inventories, and high shipments. These factors are what leads me to believe that not only will HOG trade higher after earnings, but it will continue to trade higher for the next three months.
Since Under Armour (UA) filed its IPO, it has been one of the faster-growing companies in the apparel industry with year-after-year growth. The company is scheduled to announce earnings on January 26, and analysts expect the company to post an EPS of $0.61. Over the last three quarters the company has easily exceeded expectations, and with several catalysts for growth, I believe it will do so once again.
In the sports apparel industry, the company has reported $1.37 billion worth of revenue during the last 12 months, much less than Nike's (NYSE:NKE) $22.66 billion. However, it continues to grow its market share on a quarterly basis, which include its last quarter, when revenue grew 41.70% year-over-year. The company has plenty of room for growth and has a shoe line that is one of its many catalysts for growth. The only concern is its market valuation, which is 44x earnings, which means that if the company doesn't meet expectations, it could fall by a large margin. There are some that believe Nike could potentially acquire the company because of its increasing market share, which should protect the stock even if UA were to slightly miss earnings. Overall, I see no reason why the company won't continue to grow, report strong earnings, and post large gains in the near future.
Back in July of 2011 SodaStream (SODA) was extremely overvalued, but after a 50% loss during the last 6 months, the stock is presenting one of the best opportunities for large gains within the market. The company's not scheduled to release earnings until March 5, but as the market continues to recover, you can almost guarantee this stock will trade much higher. The company's growing at an unprecedented rate; in its most recent quarter the company grew revenue by 39% and earnings by 275% year-over-year. It has very little debt on its balance sheet, and is yet to tap into its full potential growth potential.
Despite the company's impressive fundamental improvements, which include higher margins year after year, there are still some who believe its products are a fad and that it can not sustain long-term growth. For those with this opinion I urge you to refresh your memory with the history of The Coca-Cola Company (NYSE:KO), which built a massive brand and company with just one product for many years. SODA is already much better positioned with many flavors and a product that creates continuous revenue. I find it hard to believe the company's a fad or near the end of its bullish growth when there are still so many people who are yet to try its products.
Just recently the company expanded into hundreds of additional stores after completing a successful test-run with Costco (NASDAQ:COST) and Best Buy (NYSE:BBY) increasing the number of its stores that sell the product, which is now all of its stores. The company also announced a partnership with Kraft Foods (KFT) to carbonate its Crystal Light and Country Time brands, which will significantly increase its position and sales among consumers. This is a good sign for many reasons: It signals that the company is pursuing partnerships with other companies, and it shows that its carbonated drinks could be entering additional stores in the near future.
SODA is expanding at an impressive rate, and after just one year in U.S., its total revenue has already increased by nearly 65% year-over-year. I expect more growth as it enters the Japanese markets. With a 50% loss over the last 6 months, this stock is presenting great value, and I believe that as earnings approach, it will begin to rise. After it announces another great quarter, we can expect a steady trend to new highs.
In my opinion, these 6 stocks present the likelihood for strong gains following their earnings reports, and potentially gains before earnings as investors prepare for strong results. These companies are very different, and each stock trades in a different pattern. Therefore, if you have considered purchasing one of these stocks, you must weigh the risks and rewards to determine whether or not it would make a good investment. But overall, I like each of these stocks over the next few months, and believe they will all be trading higher in the immediate future.
Disclosure: I am long SODA, UA.