This year is a tough spot for making stock picks. The market is at all time highs; making it much tougher to find significant upside. Because of this, I've chosen two companies that have made a trend of producing strong earnings growth.
When last I touched on Home Depot (NYSE:HD), the stock was having a great 2016, with a stock price that wasn't receiving much attention. The Home supply giant reported 4th quarter results that affirm my feelings about the stock for 2017. The quarter's $22.2 billion in revenues is 5.8% higher than 2015, while store sales grew 5.8%. The biggest strength came from comparable US store sales growing 6.3%. All this lead to a 23.1% Q4 increase in diluted earnings per share (year over year) from $1.17 to $1.44. Like I said in my last article, I like this stock.
Personally, I like to look at year to year changes versus quarterly news. On an annual basis, Home Depot is also making ground. Sales for the fiscal year 2016 grew by 6.9% to $94.6 billion. Earnings for the year increased over 18% to $6.45 a share. This is not a new trend either. Home Depot has consistently increased revenues five years in a row. Net income increased consecutively through those years as well; now at $7.01 billion in 2016.
The company's long term moves to improve its e-commerce business, and bring in more customers from the professional market appear to be paying off. Factor in a strengthening housing market, and Home Depot seems primed to continue its success. The company has recently announced a large 29% increase in its dividend. This is obviously a welcome sight to shareholders.
My one critique for HD is the debt. The company has increased debt to finance share buybacks. It's not the most desirable way, but if the stock can keep climbing, HD may be able to pay off the debt later if it sells shares.
First Commonwealth Corp. (NYSE:FCF) is a small bank continually making moves.
I first started watching First Commonwealth back in 2011. I wanted to buy shares when the stock was sitting at $3.66 but I was a poor college student. Today the stock is over $14. It's a conservatively run bank that does things carefully. Some might fault this approach, but things are paying off for shareholders. The bank has grown interest income consecutively for four years while larger institutions in the area like PNC Financial (NYSE:PNC) have failed to do so.
While not doing anything drastic the Indiana, PA based bank is managing itself well. FCF has been buying up small banks in the Ohio area as M&A for the territory has been heating up. In 2016 it completed its acquisition of FirstMerit, a small 13 branch Ohio bank. It also announced the $106 million acquisition of DCB Financial (OTCPK:DCBF) which is expected to add 4% to earnings this year.
Big moves? No. These are small, beneficial purchases. That's why I like this bank for the future. It is never going to do anything to get itself into trouble. In the past two years, FCF has crushed the S&P 500 by 52.72%. Prior to its big stock surge this fall, it was also paying a nice dividend. Though the current 2.3% isn't the bottom of the barrel either.
I think 4th quarter earnings have provided the fuel to keep this stock going up. The bank reported record 4th quarter earnings of $17.9 million or $22 cents per diluted share. That's almost 48.9% higher than the year before. Returns on average assets are at their highest point in over a decade. For the year as whole, earnings per share grew by 20%. I think this growth can happen again in 2017 as interest rates become more favorable to banks, and as their Ohio purchases open up that market.
FCF expects to finish its acquisition of DCB Financial on April 3rd. The finalization can be expected to have a positive impact on earnings and revenues this year. The coming debate on tax reform, healthcare reform and trade will likely cause a few pullback opportunities. First Commonwealth is a great small bank alternative to some of the bigger names. The one sector that has the most going for it is financials. Not because it won't be affected by these hot topics, but rather because of improving rates and lower lighter regulation. A combination of M&A activity with rising rates are an excellent cocktail for the bank.
Even if these two stocks don't trip your trigger, be smart and do some tough thinking about any purchases right now. The market is so high, and in many cases earnings haven't caught up to the valuations. Tesla Inc. (NASDAQ:TSLA) is an example of wild speculation without financial backing. Twitter (NYSE:TWTR) has failed to make money, yet still trades at $15. Don't jump into equities like this when the market has so much room to fall. Find solid earnings; not the "what if" stocks.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.