Wall Street analysts are taking a more upbeat view of S&P 500 companies’ earnings potential for the rest of the year—but many firms’ stock prices haven’t caught up. This discrepancy could provide investors with potential buying opportunities.
As of Friday, 89% of companies in the S&P 500 had reported their second quarter earnings, and 87% of all S&P 500 companies have beaten Wall Street analysts’ projections — marking the highest percentage of positive surprises since at least 2008.
Analysts expected a strong earnings bounceback from last year’s pandemic-based weakness, but the real numbers came out even stronger. In aggregate, S&P company earnings beat estimates by 17% .
This has significantly boosted analysts’ confidence. In July, they increased their estimates for S&P 500 companies’ third-quarter earnings by 3.6% on average, according to FactSet. Cyclical sectors like energy and materials saw the strongest boosts, with their estimates climbing 14% and 8.8%, respectively. The upward revisions continued in the first week of August.
The tweaks are notable: Analysts usually reduce their earnings estimates during the first month of the quarter. For the 40 quarters in the past decade, the average decline has been 2.1%.
Still, with the S&P 500 trading at near-record high valuations, some stocks have recently pulled back. Barron’s screened for companies whose third-quarter and fourth-quarter earnings estimates have been both boosted by more than 5% over the past month—but whose share prices have dropped more than 5% in that time period. (Companies with negative earnings are excluded from the list.)
This left us with 25 names, more than half of which are energy stocks, such as Exxon Mobil (ticker: XOM) and ConocoPhillips (COP). There are good reasons for this: The price of oil has jumped 37% year to date and now trades 475% higher than last year’s low. However, the energy sector has been struggling with low valuations for the past decade, due to concerns over fossil fuels’ negative environmental impact and potential financial risk.
Investors that want to stay away from the energy sector still have 11 stocks to choose from, such as videogame company Electronic Arts (EA) and homegoods retailer Bath & Body Works (BBWI). All of these 11 stocks are expected to see their share prices rise in the next 12 months, according to Wall Street analysts’ consensus target prices.
Catching Up Soon?
In the past month, analysts have boosted their projections for these companies’ 2021 earnings, but the stocks have pulled back.
| Company / Ticker | 1M Change in Q3 EPS Estimate | 1M Change in Q4 EPS Estimate | 1M Change in Stock Price | Price to FY2021 Earnings |
|---|---|---|---|---|
| Fidelity National Information Services / FIS | 9.3% | 14.0% | -7.7% | 19.8 |
| Electronic Arts / EA | 82.3 | 202.5 | -5.1 | 20.7 |
| Baxter International / BAX | 25.6 | 8.4 | -8.4 | 21.1 |
| Teleflex / TFX | 6.1 | 14.5 | -6.9 | 29.1 |
| AES / AES | 43.2 | 20.4 | -5.7 | 16.1 |
| Bath & Body Works / BBWI | 29.7 | 11.5 | -16.8 | 12.1 |
| PTC / PTC | 7.3 | 40.2 | -6.0 | 38.3 |
| Howmet Aerospace / HWM | 17.8 | 21.7 | -7.6 | 31.7 |
| Invesco / IVZ | 8.0 | 12.0 | -5.9 | 8.1 |
| BorgWarner / BWA | 13.5 | 6.8 | -6.4 | 10.9 |
| Vornado Realty Trust / VNO | 8.1 | 52.3 | -9.0 | 69.1 |
Note: Data as of Aug. 6, 2021
Source: FactSet
The other non-energy stocks we found were Fidelity National Information Services (FIS), Baxter International (BAX), Teleflex (TFX), AES (AES), PTC (PTC), Howmet Aerospace (HWM), Invesco (IVZ), BorgWarner (BWA), and Vornado Realty Trust (VNO).
Of course, the list is just a starting point to locate companies that are potentially undervalued. More fundamental research is needed before making any purchase, because each company might have specific reasons why their stocks are falling.
Consider Vornado Realty Trust: The real estate investment trust mainly invests in Manhattan office buildings and street retail. Depending on how investors predict the Delta variant affecting New York City’s reopening, projections for the stock’s future performance and rent-driven yield could vary wildly.
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