Stock in Advanced Micro Devices has plunged this year.
Dreamstime
The latest corporate earnings news isn’t giving stocks a lift, but it is still possible to find shares that can jump in response to profit reports. One strategy is to look for beaten-down stocks where Wall Street is increasingly upbeat about profits.
It isn’t that earnings have been bad. Aggregate first-quarter earnings per share for the S&P 500 companies that have disclosed their results so far were 8.7% higher than expected as of Monday morning, according to Credit Suisse data.
Yet the average move in those stocks on the day after the results lagged behind the S&P 500 by 0.19 percentage point, according to figures from Wells Fargo . Companies don’t seem to be getting credit for earning more than expected.
That is partly because stocks are already expensive. The S&P 500 is trading at just under 19 times the aggregate per-share earnings expected for index companies in the coming year. That looks high, given that bond yields have surged of late, reducing the discounted current value of future earnings.
Strategists at Truist recently downgraded stocks in response to those higher yields. And strategists at Morgan Stanley are assuming a multiple of 18 times forward earnings in setting their target for the level of the S&P 500, implying that they expect valuations to slip.
When stocks are expensive, they are already reflecting a large stream of profits in the future, so companies must beat earnings expectations by an even greater margin in order to move their stocks higher. That hasn’t been happening consistently so far in this profit-reporting season.
The stocks to own ahead of earnings reports are the ones that have been beaten down particularly badly, even as expectations for their earnings have risen. Evercore strategists put together a list of stocks that have fallen much more than the S&P 500’s roughly 8% year-to-date decline, with increases in profit expectations far bigger than the 2% rise in aggregate EPS analysts expect.
The companies on the list could be ripe for gains after earnings because while Wall Street has penciled in big profits, their stocks are down, so their prices may not reflect the full stream of profits ahead.
Here are five stocks that fit the description:
Nvidia (ticker: NVDA) is one of the worst performers in the S&P 500 this year. It is down 26% so far in 2022, but analysts have raised their estimates for EPS for the calendar year by 9.4% since the end of December.
Snowflake (SNOW) stock has fallen 43% for the year, but its 2022 EPS estimates have more than doubled.
Advanced Micro Devices (AMD) stock has dropped 35% for the year, but estimates for its 2022 EPS are up 20%.
Zillow Group (ZG) stock is down 28% this year, but expectations for its EPS for 2022 are up more than twofold.
Pool Corporation (POOL) stock has fallen 27% for the year, while expectations for its EPS for the year are up almost 8%.
It might just be time to go bottom fishing.
Write to Jacob Sonenshine at [email protected]
