3 Stocks Show: ‘It’s Earnings, Stupid’

12/12/2011 7:30 am EST


Richard Moroney

Editor, Dow Theory Forecasts

You can worry about everything in the world, but when it comes to investing, it’s always better to stay focused on a few tried-and-true measures of a company’s value, writes Richard Moroney of Dow Theory Forecasts.

With stocks gyrating on the sovereign debt woes gripping Greece, Italy, and other European countries, investors would do well to heed the advice of legendary fund manager Peter Lynch.

More than 20 years ago, in his popular book One Up On Wall Street, Lynch wrote, “People may wonder what the Japanese are doing and what the Koreans are doing, but ultimately the earnings will decide the fate of a stock.”

Given the uncertain backdrop and tepid economic outlook, companies with earnings momentum stand the best chance of rewarding investors with higher stock prices. And given the recent market slump, many such stocks are reasonably valued. With that in mind, we screened for stocks with high scores for Quadrix Overall and Earnings Estimates.

In addition, we focused on stocks that exceeded consensus profit estimates in each of the last three quarters and have positive revisions for current-year and next-year earnings. All are reasonably valued.

CF Industries (CF)
The fertilizer maker is benefiting from high farm income due to favorable crop prices. Revenue surged 53%, while cash flow jumped 75%. Healthy industry fundamentals and robust demand could allow for price increases and keep sales rising.

Wall Street sees per-share profits of $22.61 in 2011 and $22.85 in 2012. Last year, the company earned $8.05. CF Industries is a Focus List Buy and a Long-Term Buy.

Intel (INTC)
The bellwether microchip maker has posted three straight quarters of at least 16% per share profit growth and 21% or higher sales growth. Buoyed by strength in emerging markets and demand for notebook computers, the company has exceeded consensus profit estimates in four straight quarters, by an average of 11%.

December-quarter earnings per share are projected to increase 17%. Full-year earnings per share should rise nearly 21%. For 2012, the consensus projects 5% growth, a target that sounds conservative. Intel is a Focus List Buy and a Long-Term Buy.

MasterCard (MA)
The credit-card issuer is pushing to have its payment technologies, including the popular PayPass, built into more mobile devices. In mid-November, the company and Intel agreed to collaborate on enhanced online-shopping security and payment options.

MasterCard has topped consensus profit estimates for seven consecutive quarters, and the estimate for 2012 has climbed more than 4% in the last 90 days, now implying 16% growth to $21.67. MasterCard is a Long-Term Buy.

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