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Hitting a baseball, they say, is the most difficult feat in sports. No wonder players who hit safely just three times out of 10 at-bats are considered stars. In the corporate world, the elite consists of companies that routinely knock it out of the park during earnings season.
Investing pros refer to these companies as triple plays. They surpass analysts' estimates for profit and sales, and then they raise expectations about future results.
Less than 10% of companies pulled off triple plays in the earnings season that ended this winter, according to Bespoke Investment Group.
The least-common component of the triple play is raised guidance, which occurs when a company signals to investors that it will continue to top expectations. Company executives often indicate that they're optimistic by using words like "robust" and "healthy" when talking to Wall Street about demand for their products. This happens less often in uncertain economic climates.
"There are very few companies that are sticking their necks out going forward," says Ron Muhlenkamp, manager of the $635 million Muhlenkamp (MUHLX) fund.
By many measures, however, corporate America has never looked healthier. The country's largest nonfinancial companies hold hundreds of billions of dollars in cash on their balance sheets. When the economy tanked, companies slashed spending to make a profit. Today, more of them are earning profits the old-fashioned way: by increasing sales. By the end of 2010, corporate profits had surpassed the heights they'd reached before the recession.
And now revenue is rebounding too.
During the slowdown, companies with sales growth tended to be those, like Family Dollar Stores (FDO, news), that catered to budget-conscious consumers. But sales are now closing in on their prerecession peaks, says Aaron Smith, senior economist at Moody's Analytics.
Among triple plays, Apple (AAPL, news) is the paragon, a growth company that continues to confound.
"It's growing at a ridiculous clip," says Michael Sansoterra, manager of the RidgeWorth Large Cap Growth (STCAX) and an Apple shareholder.
There are questions about how long Apple can keep creating products that consumers think they can't do without and whether the iPad will start to cannibalize Apple's laptop computer sales. For now, though, many investors think the stock is a bargain, given its growth prospects.
"Can the stock go up another 50%? Sure," says Jerry Jordan, the manager of the Jordan Opportunity Fund (JORDX) fund and an Apple shareholder.
Many investors would contend that Apple is in a category of its own.
For most companies, the ability to beat Wall Street's estimates involves psychology as much as business chops. Investors punish companies that fail to meet estimates. Knowing this, managers often offer conservative guidance (or none at all).
That's why it's noteworthy when executives raise guidance. In effect, they're saying, "Have I got news for you," says Sandeep Dahiya, associate professor of finance at Georgetown University's McDonough School of Business.
Rather than focusing on whether companies beat estimates, investors should use a company's earnings report as a starting point, the pros say.
Many professional investors create their own earnings models for the companies they hold and then compare their own projections with those of analysts and company management. There's often a herd mentality among analysts, some critics say. "By the time everyone upgrades Netflix (NFLX, news) to a "buy," it's too well known" to offer great growth prospects, says Bob Auer, the manager of the Auer Growth (AUERX) fund, whose holdings include the triple play Altera (ALTR, news), a maker of microchips.
A company's earnings can offer a hint about where its share price is headed. Research on so-called "post-earnings-announcement drift" shows that stock prices generally continue to move in the direction of the earnings surprise for up to a year after the announcement.
"The companies that beat expectations continue to do very well," Dahiya says.
