Most of the earnings reports are in for the third quarter. But a contrarian play based on the results to date could actually be investment opportunities.
According to FactSet, of the 94% of the S&P 500 companies that had reported earnings as of Nov. 17, 82% delivered a positive earnings per share surprise, while 62% had a positive revenue surprise in the quarter.
If my math is correct, of the 470 companies that had reported by Nov. 17, 385 delivered an EPS surprise. That leaves me with 85 companies to choose from in my contrarian play for December and beyond.
Furthermore, the Q3 2023 growth rate for the index at that point in the collection of earnings data was 4.3% — the first positive growth since Q3 2022. That’s encouraging news heading into 2024.
According to FactSet’s findings, the market is rewarding positive earnings surprises and punishing negative earnings surprises more than average.
So, the trio of names I’ll be looking at likely have seen their shares hit as a result of their negative earnings surprises, providing contrarian investors with more upside on their investments.
Chevron (CVX)
Chevron (NYSE:CVX) reported its third-quarter earnings on Oct. 27. Its earnings per share were $3.05, 65 cents below analyst estimates. However, its revenue of $51.9 billion was $500 million higher than the consensus.
CVX shares are down nearly 7% since the earnings announcement. Its shares are now down more than 20% over the past year.
Interestingly, this time last year, a barrel of West Texas intermediate (WTI) was about the same price, maybe a couple of dollars higher, but still a profitable price point for the company, whose estimated breakeven on a barrel of oil is $45.
So, while Chevron missed its Q3 2023 EPS by 18%, and its year-over-year earnings fell 45%, from $5.56 in Q3 2022, it still generated $9.7 billion in cash flow from operations (CFFO) and $11.7 billion in free cash flow in the first nine months of the year.
On an annualized basis, its free cash flow of $15.6 billion, is a free cash flow yield of 5.4%. I consider anything between 4% and 8% to be growth at a reasonable price.
Moderna (MRNA)
Moderna (NASDAQ:MRNA) reported Q3 2023 earnings on Nov. 2. The company’s net loss was $3.6 billion, nearly 5x the analyst estimate. Approximately 86% of that loss was for non-cash charges related to scaling back its COVID-19 manufacturing and also a tax valuation allowance.
Moderna is clearly resetting its business after its tremendous growth during the pandemic.
“We’ve built this big machine for the pandemic to save as many lives as we could,” CEO Stéphane Bancel told Barron’s in an interview. “Now as we move into endemic, the company structure is not adapted for that type of volume. Nobody knew what was going to happen after the pandemic in terms of volume.”
Like any other business faced with a changing landscape, it’s had to initiate moves to right-size the business.
Bancel believes the company can breakeven in 2026, while analysts expect Moderna to lose $1.90 a share in 2026, returning to profitability by 2027.
In the meantime, it currently has 45% of the U.S. COVID-19 vaccine market, up from 36% a year ago, and it has a second vaccine product coming out in 2024 to help grow revenues.
Down 57% year-to-date, its shares haven’t traded this low since Nov. 2020.
DTE Energy (DTE)
DTE Energy (NYSE:DTE) reporte Q3 2023 results on Nov. 1. The utility earned $1.44 per share in the quarter, missing the Zacks Consensus Estimate by 28 cents. Year-over-year, its earnings declined by 10% from $1.60 in Q3 2022.
In addition to missing the estimate, DTE lowered its 2023 operating EPS projection to $5.75 at the midpoint of its guidance, down from $6.25 previously, seven cents higher than the Zacks Consensus Estimate.
On Nov. 17, DTE Energy announced that it would reduce its customers’ power bills by $300 million annually starting Dec. 1. The move lowers the average monthly bill by $5. That’s better than nothing. The reduction has to do with the fuel it buys to generate its electricity. Those prices have stabilized enabling it to pass the savings on to its customers.
However, that could be shortlived, as it has asked the Michigan Public Service Commission (MPSC) for approval to raise prices with its 2.3 million customers, investing the gains in cleaner energy.
Yielding 3.7%, its shares are down more than 12% YTD. They traded near $140 in April 2022.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
