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5 Stocks With Good Numbers in a Grim Quarter

This earnings season, investors got good news early and grim news late, it seems. Three weeks ago, when only 108 members of the S&P 500-stock ticker index had reported results, Standard & Poor’s said earnings were tracking 20% ahead of estimates.  Wednesday, with numbers in from 455 companies, S&P said earnings were running 25% behind estimates.

For now, just 37% of companies have beaten earnings estimates. Fewer have also topped sales forecasts and just a handful have done so while growing at a decent pace. More on them in a moment. 

Upside earnings surprises are an important indicator for stock ticker investors. It’s not just that stock ticker prices often jump right away when companies announce better-than-expected earnings. Studies show they also tend to creep higher for several months afterward, outperforming the broad market in the process. Researchers call that post-earnings announcement drift.

PEAD boosts shares of some estimate-beaters more than others, though. A 2006 study published in Financial Analysts Journal looked at thousands of earnings reports from 1987 to 2003. The top 20% in terms of upside earnings surprises beat the broad market by three percentage points over the following six months, it found. The top 20% in terms of sales surprises beat the market by 2.6 percentage points over the same period. But a cross-section of the two — companies that far surpassed both sales and earnings estimates — trounced the market by 5.3 percentage points over six months.

Companies that beat earnings forecasts but disappoint on sales might simply be cutting costs to please Wall Street. The trouble is, cost-cutters eventually run out of ways to save. And sometimes management frugality can hurt shareholders. A recent study found that companies that top earnings forecasts by slashing research and marketing budgets tend to underperform the broad stock ticker market over the long term.

One way to read the recent souring of earnings season is to conclude that the surge in stock tickers since March is unwarranted, and to raise cash. (On Tuesday, this column <a href=” tickers/are-we-headed-for-a-third-bubble/”>considered whether stock ticker investors are headed for a third bubble.) Investors who remain convinced the market will continue climbing might wish to favor companies that recently topped financial forecasts. Banks beat low expectations early in the season, but energy companies have since missed forecasts by a wide margin. Retailers report over the next several days.

I searched among S&P 500 members that have already reported quarterly results for ones that increased both sales and operating earnings per share (as measured by S&P) by at least 10% apiece vs. a year ago. I also looked for positive surprises in both sales and earnings per share (as measured by Thomson Financial). Just 16 companies met those demands, a couple of which I ignored because they benefitted from unusual windfalls. Below are the five survivors with the biggest sales surprises.

Screen Survivors
Ticker Company Share Price Quarterly
EPS Growth
Sales Growth
EP El Paso 8.7 121.74 28 16.94 18
HCBK Hudson City Bancorp 12.83 44.44 4 17.89 4
AMZN 77.93 20.59 33 18.23 3
MHS Medco Health Solutions 45.98 15.69 1 14.43 8
PGN Progress Energy 35.77 13.79 8 18.2 13

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