3 Stocks with Strong Estimate Revisions - Investment Ideas
November 09 2011 - 7:00PM
Zacks
Pick a stock. Any stock. Now what is the one thing that would drive
shares higher? Sure, you might say top line growth or better
margins, but that just means higher earnings at the end of the day.
Earnings continue to be the most powerful factor in a stock's
price.
EPS and share price go hand in hand. Of course there are some
anomalies out there, but the vast majority of stocks trade in the
same direction of their earnings estimates, especially in the long
run.
Revision Season
The fastest way to spark analyst activity is with a quarterly
report. While the earnings steal all the headlines, it really only
helps those already invested. When looking at a new position, those
subsequent estimate revisions should be the focus.
After all the market is a forward looking mechanism.
As this earnings season winds down, we can take a step back from
the headlines and see which companies should benefit the most
moving forward, via upward estimate revisions.
Stocks Analysts Love
There are 101 other things to look at when choosing an
investment, but most boil down to the bottom line. So here are a
few stocks that should see higher share prices given their recent
earnings estimate revisions.
Lithia Motors (LAD) posted its sixth consecutive earnings
surprise on Oct 26 and that was quickly followed up with a round of
estimates revisions.
All 4 analysts polled by Zacks raised their EPS targets for 2011
and 2012. This year's average estimate is up 17 cents, to $1.88.
Next year's consensus rose 12 cents, to $2.04. That puts growth
rates at 99% this year and another 9% in 2012.
Here is a 5-year chart with the Zacks Consensus Estimates
represented by the colored lines and the share price in black. You
can see the upward estimates, particularly in the 2011 consensus
(the blue line). A few years ago you can see the pattern towards
the downside as well.
It is not going to be in lockstep but shares respond well for
this Zacks #1 Rank (Strong Buy).
Arctic Cat (ACAT) is a prime example. Estimates up, stock
up. Estimates down, stock down.
After ACAT reported, also in late October, analysts unanimously
raised estimates. The fiscal 2012 consensus jumped 15 cents, to
$1.15 for a growth rate of 64%. Next year's rose 14 cents, to $1.30
for a growth ate of 14%.
Surging estimates have given ACAT fantastic valuations, even
after a spike in share price. The forward P/E is about 18 times,
which puts the PEG ratio near 0.8.
Kennametal Inc. (KMT) saw a rush of upward estimates
revisions in the past 2 weeks thanks to its earnings release.
The consensus estimate for this year rose 12 cents, to $3.72.
Next year's is up 8 cents, to $4.16. That puts growth rates at 25%
and 12%, respectively.
But, even though earnings have risen, the share price seems a
bit slower to react. Take a look at the disparity between the
consensus and the share price in the chart below. Now could be a
good time to take advantage and get into KMT.
The Power of Estimate Revisions
There are still plenty of other outside factors the go into the
direction of a stock on any given day. Be it the market sentiment,
economic data, or individual company news.
But, earnings estimate revisions have proven time and time again
to be the best indicator of future performance. We are coming out
of a very interesting earnings season, which produced thousands of
revisions. Now is the time to dig in and find some great
opportunities.
Bill Wilton is the Aggressive Growth Stock Strategist for
Zacks.com. He is also the Editor in charge of the Zacks Home Run
Investor service
ARCTIC CAT INC (ACAT): Free Stock Analysis Report
KENNAMETAL INC (KMT): Free Stock Analysis Report
LITHIA MOTORS (LAD): Free Stock Analysis Report
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