The third-quarter earnings announcement season is officially underway.
As longtime readers know, earnings season is my favorite time of year. It’s one of the rare times when the market should act rationally, where stocks with strong fundamentals get rewarded, and those that don’t have strong fundamentals are punished.
And the question on most folks’ minds is: Will it be another phenomenal season? Based on the early results, the answer is yes.
FactSet reports that only 14% of S&P 500 companies have released results so far. But about 80% of these companies have exceeded analysts’ earnings expectations – and that’s above the overall five-year average of 77%. The average earnings surprise is 6.1%.
You may recall that the big banks are the first to report earnings every season – and the majority of these banks were included in those exceeded earnings expectations.
In fact, JPMorgan Chase & Co. (JPM), Wells Fargo & Co. (WFC), Goldman Sachs Group, Inc. (GS), Bank of America Corp. (BAC), Citigroup, Inc. (C) and Morgan Stanley (MS) all posted better-than-expected earnings results. The average earnings surprise for these six big-name banks was a solid 13.55%.
But if you remember, I mentioned in Market 360 a couple of weeks ago that I wouldn’t touch most banks with a 10-foot pole. The reality is, I started my career as a banking regulator, and I know they sometimes fudge their numbers. So, I am not a big fan of the big banks.
Still, when you consider these positive results, it’s not too surprising that FactSet anticipates the S&P 500 will achieve much higher earnings growth than the current estimate of 4.1%. FactSet anticipates that wave-after-wave of better-than-expected earnings results will drive the S&P 500’s average earnings growth rate to nearly 10%.
They note that in the past 40 quarters, the S&P 500’s average earnings growth rate at the end of the season has exceeded forecasts at the beginning of the season 37 times. Also notable, in the past decade, the S&P 500 has posted an average earnings surprise of 6.8%, with 75% of companies topping analysts’ earnings estimates.
Given the number and size of earnings surprises, FactSet reports that the S&P 500’s earnings growth rate rose by 5.5 percentage points on average over the past 10 years. And when you apply this average increase to current estimates… Estimates for 4.4% average earnings growth on September 30 + 5.5% = 9.9%!
So, in other words, the third-quarter earnings season is shaping up to be another stunning one.
This Week’s Ratings Changes
Now, this week we have more than 100 S&P 500 companies scheduled to report their quarterly results. This includes high-profile names like Tesla Inc. (TSLA), General Motors Co. (GM), Coca-Cola Co. (KO) and United Parcel Services, Inc. (UPS). But next week is when we will have more of the usual flagship companies announce earnings, and that’s when I expect the market to really move.
So, in order to prepare for another fantastic earnings season, I took a fresh look at the latest institutional buying pressure and each company’s financial health. I decided to revise my Stock Grader recommendations for 143 big blue chips. (Subscription required.) Of these 143 stocks…
- Seventeen stocks were upgraded from a Buy (B-rating) to a Strong Buy (A-rating).
- Forty stocks were upgraded from a Hold (C-rating) to a Buy (B-rating).
- Seventeen stocks were upgraded from a Sell (D-rating) to a Hold.
- Two stocks were upgraded from a Strong Sell (F-rating) to a Sell.
- Thirteen stocks were downgraded from Strong Buy to Buy
- Twenty stocks were downgraded from a Buy to a Hold.
- Twenty-nine stocks were downgraded from a Hold to a Sell.
- And five stocks were downgraded from a Sell to a Strong Sell.
I’ve listed the first 10 stocks rated as Strong Buys below, but you can find a more comprehensive list – including all 143 stocks’ Fundamental and Quantitative Grades – here. Chances are that you have at least one of these stocks in your portfolio, so you may want to give this list a skim and adjust accordingly.
| Ticker | Company Name | Total Grade |
|---|---|---|
| AEE | Ameren Corporation | A |
| ATO | Atmos Energy Corporation | A |
| ATR | AptarGroup, Inc. | A |
| DOC | Healthpeak Properties, Inc. | A |
| ERIC | Telefonaktiebolaget LM Ericsson Sponsored ADR Class B | A |
| EVRG | Evergy, Inc. | A |
| GD | General Dynamics Corporation | A |
| HLI | Houlihan Lokey, Inc. Class A | A |
| ISRG | Intuitive Surgical, Inc. | A |
| L | Loews Corporation | A |
Stick to the Fundamentals for Profits
The bottom line: In order to profit the most from this earnings season, you’ll want to make sure your portfolio is positioned in fundamentally superior stocks.
I expect the current season to be particularly strong for our fundamentally superior Growth Investor stocks. Our Buy List stocks remain characterized by 469.7% average annual earnings growth and 23.9% average annual sales growth. Our stocks also have a history of posting big earnings surprises, with an average 27.8% earnings surprise in the last quarter.
As a result, I suspect our Growth Investor stocks will once again lead in quarterly earnings surprises – and in turn, lead the market higher in the upcoming weeks.
Go here now to learn more about Growth Investor and how to get your hands on our latest picks.
(Already a Growth Investor subscriber? Click here to log in to the members-only website.)
Sincerely,
Louis Navellier
Editor, Market 360
The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owns the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below:
General Dynamics Corporation (GD)
