5 stocks to watch this earnings season

Investors seeking clarity amid the mixed signals of fourth-quarter results and the current earnings season should look to these shares.

By TheStreet Staff Apr 12, 2011 11:13AM

By Jamie Dlugosch, StockPickr

 

Stocks have been quite resilient lately. As the first quarter of 2011 has come to an end, the market is perched near multiyear highs. It seems nothing can pierce traders' bubble of optimism.

 

While the bullish moves and rise in stock values may have been justified by corporate profit growth, the question now is how sustainable that growth will be.

 

We’ll find out now that earnings season has begun in earnest. Will companies blow away current estimates? If so, stock prices are likely to move higher. Or will profits slip under the pressures of competition and rising input prices that negatively affect margins?

 

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Fourth-quarter results were mostly positive, but there were some conflicting results that could be a sign of further trouble during the current reporting period. Investors seeking clarity from the mixed signals should keep their eyes on these five stocks.

 

1. Apple (AAPL)

 

Apple has been stuck in a rut for the majority of 2011. Shares have traded in a tight range of $320 to $360 per share. The nonbelievers are making a strong case that Apple’s run is done. Apple has gotten too big to continue to grow at such a fast pace.

 

That may or may not be the case, but I would not bet against this company. Considering its performance over the past several years, there are few companies more capable of delivering consistent growth than Apple. Frankly, this stock deserves a huge premium, which seems to be nonexistent today.

While it is a legitimate concern to be worried about future growth, there is nothing to suggest that this company will fail to deliver the goods anytime soon. For the current quarter, analysts expect Apple to post a profit of $5.33 per share. Over the past four quarters, Apple has beaten estimates by a wide margin. Whether it’s able to do the same in the current quarter will tell much about the state of the market.

 

Apple, one of TheStreet Ratings’ top-rated computer hardware stocks, shows up on recent lists of 36 momentum stocks to consider and 40 stocks analysts are insanely bullish about.

 

2. Delta Airlines (DAL)

 

One industry that has not performed well in 2011 is airlines. Inflation in oil prices has negatively affected the sector, sending stocks lower across the board. The speculation is that higher oil prices will result in lower profits.

 

Delta started the year trading at $12.69 per share. Today the stock trades for less than $10, at around $9.30 per share. That is a decline of more than 25%. Ouch!

 

In my opinion, the market is taking the path of least resistance with respect to airline stocks. It is far too easy to sell the stocks when oil prices are trading above $100 per barrel. Dig a bit deeper and I think a far different conclusion can be found.

 

Analysts expect Delta to post a loss of 40 cents a share for the current quarter but a profit of $1.48 a share for the full year. Given that airlines have been able to raise prices in this period, I would suggest that the numbers will be better than expected.

 

Look for a snap-back rally in these stocks, including Delta.

 

One high-profile Delta bull is George Soros. In fact, in the most recently reported period, Soros Fund Management increased its position in the stock by nearly 300%, earning it a spot on a list of 8 top George Soros stock buys.

 

3. U.S. Steel (X)

 

With Alcoa’s earnings report, we got a clue as to the ability of corporations to deal with rising input prices. I theorized last quarter that more and more companies would warn about decreasing profits as a result of higher inflation. That theory failed to fully materialize then; some companies did indeed note rising input prices, but the majority stayed silent on the issue. In addition to Alcoa’s report, investors should pay close attention to U.S. Steel.

 

The large domestic steelmaker should be the beneficiary of a growing global economy, but just how damaging will higher costs be to the bottom line? Analysts expect a first-quarter loss of 42 cents per share. The real test will be the outlook for the future.

 

At the moment the expectation is for a full-year profit of $3.95 per share. For now investors have been selling U.S. Steel in anticipation of lower profit margins. To the extent there is no mention of the negative impact of inflation, this stock could rocket higher.

 

U.S. Steel, one of JPMorgan’s 13 favorite stocks for 2011, shows up on recent lists of Top-performing stocks picked by funds and 10 steel stocks with upside.

 

4. Wal-Mart (WMT)

 

The economy appears to be a mixed bag. On one hand, we are seeing GDP growth and a gradual improvement in the jobs picture. On the other hand, gas and food price increases negatively affect consumer cash flow.

 

Huge discount retailer Wal-Mart should be enjoying a strong operating season with such an environment. Consumers attracted to discounts can be expected to drive profit growth for the near future. Investors are not convinced.

 

Wal-Mart has slipped in value from a year peak of nearly $58 per share. Today shares are fetching around $53 per share. At the current price the company trades for approximately 12 times the 2012 profit estimate of $4.40 per share.

 

For the quarter that will end April 30, analysts expect Wal-Mart to earn 95 cents per share. Given the tightness of consumer budgets I expect them to beat that number. Anything less would be considered a disappointment and disconcerting for the overall economy.

 

Wal-Mart, which recently increased its dividend, is one of the 20 highest-yielding retail stocks and another of George Soros’ top stock buys.

 

5. Cisco (CSCO)

 

So goes technology, so goes the economy -- or at least that is the saying. Cisco, which has disappointed investors over the last few reporting periods, was in the news recently with a proclamation from its CEO that he will turn the company around.

 

What is interesting with the rare look behind the curtain of a major technology company is the timing of the release. Cisco is not due to report earnings for the current period ending April 30 until May. Could it be that the CEO is worried about another poor quarterly performance?

 

That would be my assessment, but far be it for me to know more than the market. There the news was greeted with a surge of buying of Cisco shares, sending the price higher. I would have expected an opposite reaction.

The company is expected to make a profit of 37 cents per share for the current period. Given the concern at the highest levels of management and demands for better performance, I would be worried about that estimate. In fact, I think it is a safe bet that the company will miss that number.

 

While the forthcoming changes may be refreshing and beneficial to shareholders, expect more pain in the short run.

 

Cisco, one of David Tepper’s top tech stocks in the fourth quarter, shows up on a recent list of 4 cheap dividend stocks with 25% upside and 40 stocks analysts are insanely bullish about.

 

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