Two Stocks to Watch in Earnings Season

03/24/2008 12:00 am EST

Focus: STOCKS

Louis Navellier

Editor, Blue Chip Growth and Emerging Growth

Louis Navellier, editor of Blue Chip Growth, expects corporate earnings to benefit from the weak dollar and rising commodity prices and he mentions two favorites.

We have another strong quarterly earnings announcement season to look forward to in the first quarter thanks to lots of stocks that are prospering from the weak US dollar and rising commodity prices.

Financial stocks will continue to post substantial losses in the first quarter, and nonfinancial stocks are supposed to be flat as a pancake. In fact, the first-quarter earnings are anticipated to be the "trough" in the upcoming earnings cycle.

With another quarterly earnings announcement season fast approaching and the lowest price-to-earnings ratios that I can remember in my 28-year history as a stock picker, I want to make sure that investors are fully invested in the market. The Standard & Poor's 500 has successfully retested its January 23rd intraday lows, the overall stock market is bouncing along the bottom on a valuation basis, and record corporate buybacks continue.

Corporate cash reserves remain very healthy. Plus, the presidential election rhetoric about eliminating the dividend relief tax when it expires in 2010 has spurred a corporate rush to boost and continue paying dividends before the favorable 15% federal taxation rate disappears.

Currently, only one out of 12 stocks that I screen on PortfolioGrader Pro is worth buying. A disproportionate amount of these stocks are multinationals profiting from a weak US dollar, [or] commodity-related stocks, such as those that are enjoying high crude oil, copper, gold, and platinum prices

Activision (Nasdaq: ATVI) is the video game company behind Tony Hawk's Underground, Doom, Guitar Hero III: Legends of Rock, and Call of Duty. The company also makes games based on licensed properties from LucasArts (Star Wars), Marvel (Spider-Man and X-Men), and DreamWorks Animation (Shrek).

In late 2007, Activision agreed to sell a 52% stake to Vivendi in a deal valued at $9.8 billion. The company's latest quarterly earnings rose 87% to 86 cents per share compared with 46 cents per share last year. Activision had raised its earnings forecast twice for the quarter and yet the company still beat analysts' estimates by 7.5%!

Traditionally, the stock has been "recession-proof" in that a large proportion of its customers are young and unaffected by a declining job market. (It closed below $27 Thursday-Editor.)

Gerdau SA (NYSE: GGB) forged its first nail in 1901. Today it's Brazil's largest producer of long-rolled steel. Gerdau sells its steel bars, billets, and wire rods to customers such as auto parts makers, construction contractors, and agricultural companies.

Steel stocks remain hot due to worldwide commodity inflation. In the past year, Gerdau posted solid earnings growth of 35.2% thanks to improving operating margins and steady sales growth. Additionally, the company has historically posted strong earnings surprises and trades at barely ten times forecasted earnings. I'm looking forward to its upcoming fourth-quarter earnings report. (The ADSs closed below $31 Thursday-Editor.)

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