3 All-American earnings buys

These companies have no fear of a strengthening dollar.

By InvestorPlace Jul 25, 2012 11:22AM
Image: American Eagle (© Steve Allen/Brandx Pictures/Photolibrary)By Chris Johnson

The earnings season has gone fairly well so far -- at least we haven't seen an implosion of bottom-line growth that many analysts were suggesting would happen. Looking at the data, bottom-line results have been better than analysts' expectations as 70% of S&P 500 companies that have reported have bested earnings estimates.

The same can't be said for the top line, though, as only 41% of those companies have been able to report revenue results that were better than analysts' expectations. The difference between the top- and bottom-line results tells the story of our economy and where investment opportunities might lie in the current market.


The recent dollar strength works against companies that derive the majority of their revenue from outside the U.S. Simply put, a 10% increase in the dollar means these companies have to generate an extra 10% in revenue to stay even. For this reason, we've been paying close attention on companies that generate all or the majority of their revenue here in the U.S.


Looking at the S&P 100 (OEX) companies, there's some significant outperformance between domestic and international revenue companies. For example, the top 20 companies in the S&P 100, as ranked by domestic revenue, conveniently average 100% revenue from the U.S. This group averages a year-to-date return of +9.5%!


The bottom 20 companies in the OEX, as ranked by percent of domestic revenue, average only 28% domestically sourced revenue. This group's year-to-date average return is -0.8%.


Keeping in mind that over the same time period, the average performance of all 100 OEX companies was 4.7%, the disparity of the performance between the pure domestic revenue companies and the others suggests that the "Buy American" trade is alive and well.


The table below identifies companies in the OEX that derive 100% of their revenue domestically, putting them at the top of our list of potential "Buy American" stocks:


Following our approach of investing in technically strong underloved stocks, the following three are of particular interest to us.


Lowe's (LOW): The homebuilder sector is one of the most underappreciated groups of stocks given their performance this year. An improving housing market along with some lingering consumer strength has combined to make this home-improvement retailer an attractive value play. The stock is sitting just above the $25 level, a site of support in May. Any market strength will spark a new rally in LOW shares toward our target price of $32.


Southern Co. (SO): Utility companies continue to benefit from investors' attraction to dividend-yielding stocks. In Southern's case, the high yield (4.2%) is a bonus to the stock's technical performance. Additionally, the analyst community has turned a cold shoulder to SO shares with 64% of those with an opinion rating the stock a hold. We like the chances that the dividend, and potential for upgrades as the year progresses, will drive SO shares above the $50 level.


Altria Group (MO): Altria announced better-than-expected earnings results Tuesday morning as revenue came in line with expectations. The company also managed to raise guidance slightly for the rest of the year. This announcement will get the short sellers running for cover, as MO shares boast the highest short interest ratio among the domestic revenue companies. More than half of the analysts covering the stock have it ranked a hold or sell, but that will change as this group will likely start upgrading the stock. Expect MO, which already has beat the market considerably (20% so far this year) to continue its relative strength. An intermediate-term price target of $40 is reasonable.


As of this writing, Chris Johnson did not hold a position in any of the aforementioned securities.


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Tuesday morning as revenue came in line with expectations. The company also managed to raise guidance slightly for the rest of the year. This announcement will get the short sellers running for cover, as MO shares boast the highest short interest ratio among the domestic revenue companies. More than half of the analysts covering the stock have it ranked a hold or sell, but that will change as this group will likely start upgrading the stock. Expect MO, which already has beat the market considerably (20% so far this year) to continue its relative strength. An intermediate-term price target of $40 is reasonable.
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