10 Stocks with Earnings Rebound Potential
Alan Brochstein identifies 10 stocks that may be poised for a big earnings rebound in 2012
It’s almost the end of “earnings season”. With 2010 now behind us, it’s time to focus on 2011 earnings, right? Well, not exactly. Forward-looking investors have been looking at 2011 earnings estimates for quite some time. Now is actually the time to look ahead to 2012 earnings estimates, too.
A few months ago, many analysts weren’t yet providing 2012 estimates. It’s only after they saw how 2010 ended that many of them “updated their models” and shared those forecasts. You might think that 2012 seems a long way off, but what investors are thinking about 2012 will inform where stock prices are headed at the end of 2011.
While there are many ways to define the P/E or Price/Earnings ratio, the most common is to look ahead 12 months. What is the price I have to pay relative to what the company is expected to earn over the next year? Poised as we are at the beginning of 2011, that 12-month window basically covers 2011. By the latter half of 2011, however, that 12-month window stretches into 2012.
When I estimate my target prices for stocks, I’m always looking two years out, estimating the earnings and applying what I believe is an appropriate P/E multiple. In early March, I’m actually starting to incorporate 2013 estimates into my valuation analysis. (Believe it or not.)
Besides getting you thinking about a longer time horizon, I want to share one of several potential opportunities that can arise when you extend your perspective like this. Often, a company’s earnings will stagnate or even fall for a specific reason for a year, but they often surge the next year as they recover. If you follow the logic I shared above, you may want to invest before the growth shows up.
With that in mind, I created a screen to try to identify some potential opportunities. Here is what I screened for:
• Stocks from the Russell 3000 index
• Market Cap > $500mm
• Sales >0% over past year
• 2011 EPS growth < 2%
• 2012 EPS growth > 20%
• # analysts with 2012 estimates > 1
• Estimate revisions stable
• PE < 15
• YTD Price > -10%
Let’s briefly discuss this list. First, we took all the stocks in the Russell 3000 index that are greater than $500mm in market value. Then, we made sure we’re looking at companies with growing sales (at least recently), as we don’t want to bet on a leopard changing its spots.
Next, we isolated stocks where earnings growth is likely to be weak in 2011 but stronger in 2012, based on analyst forecasts. We made sure at least two analysts’ forecasts are in play, and that these analysts aren’t cutting their 2012 estimate.
Next, we capped our expectations for P/E (based mainly on 2011 earnings estimates). Finally, to avoid walking into an accident that just happened, we made sure that the price is no worse than down 10% YTD. Here is the first cut of that screen’s results:
The following stocks should NOT be viewed as recommendations; rather they represent my market analysis based on the screening criteria chosen. You’ll need to do your own due diligence to research whether any of these are attractive investment candidates for you.
We got a pretty good cross-section of the economy with four different economic sectors represented. We ended up with primarily smaller companies, although one very large company, Lockheed Martin (LMT), made the cut.
I own two of these companies in the Top 20 Model Portfolio, so I can certainly discuss some challenges and my personal rationale for expecting recovery for Skecher’s (SKX) and for Plexus (PLXS). However, don’t take my word for it. You should investigate all of these names further before investing your own money.
Skecher’s (SKX) rode the toning-shoe wave but got caught with too much inventory. That excess inventory will likely depress earnings in 2011, but it seems likely the company could bounce back strongly once the inventory is worked off later this year. The company has no debt and substantial cash, and it trades near the value of its assets – all encouraging signs.
Plexus (PLXS), which provides engineering and manufacturing services to a wide spectrum of clients, lost two accounts due to acquisitions. Their underlying growth outlook looks strong to me, but the company has been hurt by the delay of Coca-Cola’s rollout of its new soda fountain, the FreeStyle. New business wins and the ramping of the Coke business may lead to a strong year for PLXS in 2012.
Additionally, the company just announced what could prove to be a very aggressive share repurchasing program.
Screening is a tool to identify stocks to study more closely for potential investment. In this case, we’ve identified 10 stocks that appear to have near-term challenges from which they are expected to rebound sharply next year. If that proves to be the case, buying them this year could prove lucrative as other investors begin to incorporate 2012 estimates into their outlooks.
As always, this list is only a starting point, as it’s important to dig deeper to understand the challenges and the likelihood that the company will recover.
Founder, Invest By Model, My Own Analyst and AB Analytical Services
TradeKing All-Star Commentator
Disclosure: Long PLXS and SKXTop 20 Model Portfolio (Invest By Model)
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