In this article I am separating the good from the bad, not in terms of stock performance, but rather fundamentals compared to valuation following earnings. This is one of the best times of the year to capitalize on value, and in this piece I am looking at three stocks that are presenting large upside.
Best Q1 in More than a Decade
As the price of fuel has declined, shares of Delta Air Lines have traded higher, and on Tuesday, speculation of strong fundamental performance was made valid. The company reported what it called, “its best Q1 in over a decade,” as revenue was in-line with expectations and its bottom line exceeded expectations by more than 35%. The company did see lower capacity on regional flights, yet reported a 4.1% gain in revenue per mile to indicate that further upside is present.
There are several points that I find highly encouraging about Delta’s quarter, with one being its operating cash-flow of $1.10 billion! This is a company that saw significant operational improvements, despite a loss in capacity.
When you break down its revenue by region you can really see this difference, as revenue growth outperformed capacity by a minimum two-to-one ratio in six different categories (as seen here). Furthermore, despite its large gains, this is still a stock that is very cheap, trading at just 5.50 times next year’s earnings and a price/sales ratio of 0.35. Both ratios are far below the S&P 500 average, and because of its improvements, I say “Buy” this stock!
A Good Long-Term Investment
Travelers Companies closed on Tuesday with gains of 2.09% and is now trading at $86.35. In my opinion, it’s a stock trading with about a 15% discount to the market, with a forward P/E ratio of 11.40 and a price/sales of 1.24. It is a zero growth company, yet despite zero growth, the stock is cheap compared to current fundamentals, and it’s improving in other fundamental areas of the business. For example, the company achieved 11% income growth, despite a 1% loss in revenue, indicating a massive gain in margins.
Travelers is a large company, and it’s not an investment that will return massive gains from this point forward. However, because it’s cheap with improved fundamentals, it would make a good long-term dividend investment. When you incorporate its large buyback program and its 9% dividend hike, then I believe Travelers is a safe low beta large cap stock that could add to a nicely diversified portfolio.
A Confirmation of Growth
If you’re looking to add a little risk to your portfolio, then Coach after earnings is your investment. On Tuesday, the stock gained 9.80% after reporting its quarterly results, one in which it grew revenue by 7% yoy. Both North American and international sales were strong, but the big winner was the company’s men’s business, which is on pace to double to over $600 million this year. Furthermore, the company increased its dividend 13% and is now paying a yield of 2.67%.
Coach has been very inconsistent over the last year, losing 21% of its value, as investors fear that its growth potential had peaked. However, there are many positives from this quarter to suggest long-term growth. Sure, comparable sales were up only 1%. However, China is growing 40% and the men’s segment continues to grow as well. This is a stock trading at just 13.60 times next year’s earnings, and I think COH makes a good investment with upside and most risk priced into the stock.
In my book, Taking Charge With Value Investing (McGraw-Hill, 2013) I spent two chapters on talking about nothing but earnings, showing investors how to use the stock reaction to their advantage. Yet very few know how to use earnings to their advantage, and it is a somewhat simple skill that can lead to fundamental gains that all investors should try to perfect. While there are many steps to learning how to improve your success when buying after earnings, a core rule is to first read the quarterly report and then second view the stock. Then, you can determine whether a reaction was logical, and if not, you can profit from the illogical trading.
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