Don’t expect the stock market to surge this earnings season, which kicks off this week with the big banks. It’s already too pricey to be moved by even those robust reports. That said, there are still stocks that could ride a wave of potentially good numbers.
But before we get to the names that could pop, let’s talk about the broader market. The
Russell 1000 index
is up more than 20% from its October low. That sizable increase has raised the index’s forward price/earnings multiple to roughly 19 times from about 15 times, a high valuation given how high interest rates are.
Right now, stock prices are already reflecting solid profit growth for the next year at least. At this point, modest earnings beats can’t do much to lift the broader market. Only really big beats can do the trick.
That doesn’t mean, though, that there aren’t cheaper stocks that won’t have nice gains even if their earnings don’t wow.
Evercore strategists went looking for those names. They screened the Russell 1000 for companies with at least $10 billion market values that have ranked in the index’s bottom 50th percentile of performance since the end of March, the time when concern about bank failures and the stability of the financial system began to ease.
The companies also had to have beats for both earnings per share and sales in at least seven out of the past eight quarters, with no doubles misses, or misses on both top and bottom lines. And they had to have a double beat in this year’s first quarter—plus an increase in their shares during the trading day after their releases.
Those that made the cut:
Kraft-Heinz
(ticker: KHC), utility
Southern
Company (SO),
Procter & Gamble
(PG), Hershey (HSY), Citigroup (C),
eBay
(EBAY), and
Lululemon Athletica
(LULU).
Let’s take a closer look at the last three stocks on the list.
Citigroup is about flat since the end of March, compared with the Russell 1000’s just under 7% gain. Besides a first-quarter beat, the investment bank has seen EPS expectations for the next year dip since the end of March because of worries over loan volumes—both consumers and businesses are pulling back on borrowing and spending—and a drop in M&A deals.
All that has made
Citi’s
shares cheap: Its price/earnings multiple has fallen to just under 7.5 times, less than half of the Russell’s multiple. With expectations low and the potential for its businesses to stabilize soon, Citi simply has to beat estimates and the stock should go higher. The first-quarter double beat pushed up the price by almost 5%. Citi reports its second-quarter numbers Friday.
Also flat is eBay. Analysts’ EPS estimates for the year haven’t moved much since March. The stock is trading at quite a discount to the Russell 1000’s multiple—10 times earnings. In the past few years, it sometimes traded at only a few points below the index, according to FactSet.
If eBay’s earnings, which come out July 26, show any sign that consumers are spending more, the stock should move higher. It rose just over 5% after its last earnings report.
Lululemon Athletica stock is up just over 1%, and the EPS estimates haven’t moved much. But the stock is down from its November 2021 record high and now trades at 29 times earnings—about 50% higher than the Russell 1000’s multiple but down from about triple at the end of 2021.
Lulu always trades at a premium versus the rest of the market because of its high growth, driven by its e-commerce business and trendiness. The stock should get a boost even if the company’s earnings, out on Sept. 1, are merely solid enough. Lulu’s last report sent the shares up about 11%.
Remember, earnings season starts Friday. You still have time to pick up a few of these stocks—but not a lot.
Write to Jacob Sonenshine at [email protected]
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