7 stocks surging on huge earnings surprises

Mid-caps offer a unique combination of growth and stability, and these stocks are hitting especially hard on the growth front.

By StreetAuthority Oct 30, 2013 3:15PM
File photo of a Wendy's sign (© David Paul Morris/Bloomberg via Getty Images)By Michael Vodicka

Goldilocks is famous for being very particular about her porridge. It couldn't be too hot or too cold. It had to be just right.

That reminds me of mid-cap stocks: Not too big, but not too small -- just the right mix of growth and stability.

Unlike small caps, mid-caps are multi-billion-dollar companies and sometimes even market leaders. That provides these companies with a nice touch of stability that small caps with values dipping below $1 billion usually don't offer.

But unlike global mega-caps such as Exxon Mobil (XOM) and Microsoft (MSFT) worth hundreds of billions and long past peak growth, mid-caps valued between $2 billion and $10 billion still have the ability to grow many times over in the long run. (Microsoft owns and publishes Top Stocks, an MSN Money site).

These unique qualities have made mid-caps popular with investors looking for a balance between growth and stability. They have also produced market-crushing gains. In the past 12 years, the iShares Core S&P Mid-Cap ETF (IJH) is up 223% against the S&P 500 Index's 62% return. Take a look at the big gain below.
But if you missed out on those gains, don't worry. The third-quarter earnings season has revealed a select group of mid-caps that continue to produce outsize earnings growth. The seven mid-caps below just crushed third-quarter earnings, giving shares a boost on the chart and driving big upward revisions in earnings estimates.

These mid-caps are also in position to benefit from the "post-earnings drift," which is the tendency for stocks that beat earnings to keep rising for 12 weeks after a positive earnings surprise.

That makes this a great time to check out these seven mid-caps that just crushed third-quarter earnings expectations.
From the group, I have chosen to highlight Toll Brothers (TOL) for its bullish growth projection and Wendy's (WEN) because of its long-term potential as it continues to execute a turnaround.

Toll Brothers
One of the country's leading homebuilders, with a market cap of $5.7 billion, Toll Brothers has been cashing in on the housing recovery, with shares up a market-crushing 87% in the past two years. But in spite of those big gains, Toll Brothers still has plenty of room to grow.

Toll Brothers is focused on the high end of the housing market, where it faces little competition and its consumers tend to be less sensitive to economic fluctuations. It also focuses on wealthy, urban locations where land is in limited supply and high demand, recently landing new locations in New Jersey, New York City, Philadelphia and Washington, D.C.

With interest rates once again heading lower and Toll in position to further benefit from the recovery in housing, analysts are bullish. The 2013 consensus estimate is calling for earnings growth of 34% followed up by 86% growth in 2014. That has TOL trading with a forward price-to-earnings (P/E) ratio of 41. But when factoring the 86% growth projection for 2014, the P/E ratio falls to 20.

Wendy's is even more of a turnaround story. After years of slow sales growth and underperformance, management has been executing a strategy to revitalize its brand. That includes selling its ownership of Arby's, closing underperforming stores, upgrading existing store and designing a new logo. The results of this transformation were so strong in 50 test stores last year that Wendy's has scaled its plans up to 200 test stores in 2013.

Long term, Wendy's has plans to refurbish 50% of company-owned restaurants and 20% of total stores by 2015. Wendy's also has plans to add more locations, with management saying it expects it can add another 1,000 restaurants in underrepresented markets, a 15% increase from the current 6,500.
The good news has the consensus estimate calling for 46% earnings growth in 2013, 19% in 2014 and annual earnings growth of 21% in the next five years.

Risks to consider: Toll Brothers will remain sensitive to the housing recovery and trajectory of interest rates. Wendy's faces continued intense competition in the fast-food industry, and high input costs for ingredients are also a threat to margins.

Action to take:
Mid-cap stocks offer a great combination of growth and stability. But these seven are hitting hard on the growth front, reporting earnings that handily beat expectations.

Michael Vodicka does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.

More from StreetAuthority

Oct 31, 2013 7:04AM

Toll Brothers continues to embrace sprawl while the nation reels from suppression compression and manipulation. Never ONCE has MSN displayed a journalistic investigative report on Toll Brothers' all new energy-balanced existing suburb retrofit house. You have to be a complete IDIOT to invest in the kinds of stocks featured here. Toll sells to the minority and the minority are reliant on QE and have no substance.

Wendy's is a nice platform tied to a product line that is price-volatile right now. $5 will always be the Mason/Dixon Line for fast food lunch affordability. The COUPON price for combo meals is over that. People make less than ever. So investing in what the majority has to cut out of their budget in order to pay inflation-inflicted obligations is plain-out CRAZY.

Oct 31, 2013 11:42AM
2 stories listed  1says exxon gained brought market up   ???   2nd story reads  exxon lost 18%  ???  what don't  i get  here   or is the   market and the world that far out of touch with  each other sp is about 350 points over its  head and that is just my estimate they have come out in so many words  saying th QE is the only  thing  keeping the  market going why don't we just write a check to ever American for  a thousand  hell of a lot cheaper and  we  might just go out and buy something at least if it don't work  out  they threw the money to the  ones  who  donated it. not to some country  who could  care  less about  us  they want to  donate  money  donate  it  to  us  and  maybe we will buy  something  and  give the money  back to them 
Oct 31, 2013 12:58PM
Oct 31, 2013 1:27PM
I love mid-caps.  Established market cap. but usually under the radar, not bloated.
Oct 31, 2013 1:56PM
Patterson is the only one I would chose out of these pigs - Housing sucks and will remain sucky through 2016!!!!! So all the others are gambles I'm not willing to take. Try Anadarko and some other energy stocks - Keystone will be okayed soon and try oil shippers also!! We missed NFLX, so stay with energy through 2016!!!!
Oct 31, 2013 12:01PM
VL:  It seems I only comment when I disagree with you.  Sooo, thought I would give you an "atta boy."  Good analysis.
Oct 31, 2013 11:45AM
I'll never invest in Wendy's. I just can't put my money into a company that gave me food poisoning both times I've ever eaten there.
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