We came into this earnings season with a lot of things on our minds. In fact, we were thinking of everything other than earnings. But over the past couple of weeks, America Inc. has put on a great show.
So now we know that yes, supply chains are going to take time to iron out, labor is going to remain tight (the JOLTS report shows increasing vacancies and declining quits in December) and a hawkish Fed is going to do its thing. But that isn’t going to be enough to stop the growth, albeit at a slower rate than we’ve seen of late.
And here’s the thing: the Fed may be hawkish, but it’s extremely unlikely to take any action that could throw us into a recession. Inflation is much stronger than that. So while interest rates are going to ride higher, it’s likely to be gradual and it’s likely to be upon consideration of the current situation.
So. This, then, becomes a great opportunity buy stocks. And after the correction through January and a miss from our favorite social media company, it’s become much easier.
The thing to keep in mind is, we don’t need to find the bottom. It’s a much better idea to find obvious indicators of underlying strength -- at valuations that are off their recent highs. That’s what we’re doing here.
This selection focuses on companies that have not yet reported. But they’ve seen some strong estimate revisions of late, a sign of improving factors that have been picked up by brokers.
Let’s take a look at Houlihan Lokey (NYSE:HLI) HLI for example. The investment banking company, which provides merger and acquisition (M&A), capital market, financial restructuring, and financial and valuation advisory services worldwide reported very strong results in the last quarter, beating EPS estimates by around 44% on revenue that also beat by 44%.
A quick look at Houlihan Lokey’s estimate revisions trend shows notable increases: by 40 cents (22%) for the December quarter that the company is set to report on Feb 8. Estimates for the year ending in March 2022 are up 56 cents (9%). And similarly for fiscal 2023.
A look at the price chart shows continued declines since the middle of January. It just doesn’t make sense. Particularly because on a P/E basis, they are trading at around 16.7X, which is close to their lows over the past year.
So this looks like a Strong Buy, captured in the Zacks #1 rank.
Another stock that seems to fit the bill is Crocs (NASDAQ:CROX) CROX, which manufactures and sells casual footwear and accessories for men, women and children in over 80 countries.
In the last quarter, Crocs generated earnings that beat the Zacks Consensus Estimate by 30% coming on top of revenues that beat by about 2%.
The estimate revisions trend for the December quarter (to be reported on Feb 16) shows an increase of 63 cents (46%) in the last 30 days. For the full year ending December 2021, the estimate is up 59 cents (78%). The growth trajectory looks set to repeat this year with the average estimate up 70 cents (7%) during the same time period.
Now let’s see what prices are doing. I’m seeing a steady decline in Crocs shares since the beginning of November, down almost 42% in the last three months with a slight bounce-back in the last couple of days. This is reflected in the valuation, which at around 10.1X P/E, is also hugging the low point over the past year.
No wonder Crocs looks like a strong buy and it has a Zacks rank to match.
Next on the list is Community Health (NYSE:CYH) Systems CYH which owns, leases and operates general acute care hospitals in the U.S.
In the last quarter, Community Health posted a 69-cent profit when analysts were only expecting 5 cents. That’s a huge surprise of 1280%, driven by a surge in COVID-related hospitalizations. Estimates are tracking closer to reality since then and have been climbing steadily over the last few months. In the last 30 days, the December quarter consensus is up 8 cents (19%) while the 2022 estimate is up 14 cents (12%).
Community Health shares dipped in the beginning of December but have trended up since then. The valuation based on P/E shows that they are still rather undervalued at a 9.57X multiple. A strong report when the company reports on Feb 16 would send the shares higher.
As with the other two, Community Health also carries a Zacks Rank #1.
One-Month Price Performance
Image Source: Zacks Investment Research
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