7 mid-cap stocks that consistently crush earnings

These companies beat expectations in the last 9 quarters. Here's why you should be watching them this earnings season.

By MSN Money Partner Feb 7, 2013 12:42PM
Financial Stock Chart Kick Images Photodisc Getty ImagesBy Michael Vodicka, StreetAuthority

Earnings season is the most dangerous time of the year for companies and investors alike. The Street frequently punishes companies that fall short of expectations, with investors quickly bailing on stocks that show even a glimpse of weakness.

Take Apple (AAPL) for example. Even though the company's recent fourth-quarter results beat analyst estimates, Apple was hit with a 10% loss just hours after the release because sales and margin year-over-year growth slumped in key areas.

It's a simple lesson, but also one that reinforces just how important it is to invest in companies that consistently beat expectations. Companies that consistently beat earnings expectations are sending a big message to the market.

At the highest level, an earnings surprise says a lot about management. It demonstrates management's ability to identify new investment opportunities to drive return on equity. It also means the company's leadership effectively manages analyst expectations. Letting the analyst community get too bullish, and then missing overly optimistic estimates is a cardinal sin for a good management team.

It's also important to recognize that earnings surprises are driven by earnings growth. A company with a consistent record of beating estimates is demonstrating its ability to grow earnings in all different stages of the economic cycle. Consistent earnings growth also helps on the valuation front, still the single most important factor affecting a company's share price.

As you can see, a company that consistently beats expectations has a few things to brag about.

But when it comes to large caps, heavy analyst coverage makes it hard to sneak up on the Street with anything new, even an earnings surprise. On the other side of the spectrum, small caps have so little analyst coverage that can it can lead to extreme volatility. 

That's why I look to mid-caps when I want to find companies that consistently beat earnings. Mid-cap stocks offer a great blend of growth, stability and the perfect amount of analyst coverage to set the foundation for an earnings surprise that will push shares higher. 

I built a list of seven mid-caps that consistently crush earnings. In fact, each one of the stocks listed has had an average earnings surprise of more than 50% in the last nine quarters.

Of the seven, two companies stand out: Hillshire Brands because it operates in the bullish food and agriculture industry, and Atmos Energy because of its leverage to natural gas.

1. Hillshire Brands Co.
Hillshire Brands is a food manufacturer with an impressive portfolio of brands that includes Jimmy Dean, Ball Park and Sara Lee. With the food and agriculture stocks jumping higher in the past few years, Hillshire Brands has been on the move, up a market-beating 33%. These gains have been driven by solid earnings growth, with analysts looking for 17% earnings growth in the fourth quarter of 2012 and another 6% in 2013. 

This has lifted Hillshire Brands to an average earnings surprise of 59% in the last nine quarters. The company also carries a solid dividend yield of 1.7%, which is almost on par with the 10-year Treasury note's 1.9% yield.

2. Atmos Energy
This utility company stores and distributes natural gas in the U.S. This places the company in an excellent position to capitalize on the secular growth trend in the consumption of natural gas. Atmos is up 17% in the past year, almost directly in line with the S&P 500. As a utility, this stock offers high barriers to entry, consistent growth and a solid dividend yield of 3.5%. But in spite of its status as a utility, growing demand for natural gas has lifted Atmos to an average earnings surprise of 56% in the last nine quarters.

Risks to Consider: Actual earnings are important but forward guidance is as well. Companies that beat earnings expectations can still trade lower if guidance comes in below expectations.

Action to Take --> These seven mid-caps have averaged more than a 50% earnings surprise in the last nine quarters. And with Hillshire benefiting from the bullish trend in food and agriculture, and Atmos in position to gain from the natural gas boom, these are two mid-cap stocks with strong histories of earnings surprises to keep an eye on this earnings season.

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