Fourth-quarter earnings season is almost over and the results have been pretty underwhelming.
Out of the 342 S&P 500 companies that have reported so far, representing 78% of the index's total market cap, earnings are up a meager 2.8% from the same period in 2011. Of these companies, just 67% have beaten earnings estimates, logging a median earnings surprise of 3.3%. Total revenue hasn't looked much better either, up just 2.7% from the year-ago period with only 64% of companies coming in ahead of expectations.
Those less-than-remarkable results have been driven by a number of disappointing performances from headlines companies. Apple (Nasdaq: AAPL) fell 10% after showing signs of slower revenue growth and margin compression. General Motors (NYSE: GM) was also under pressure after posting results that fell short of expectations.
With fourth-quarter results showcasing how many companies from different sectors are struggling with slow economic growth, the companies that actually beat expectations are generating a lot of attention. But even though a big surprise is great in its own right, which is usually good for a nice pop in shares, the real effect of an earnings surprise is upward revisions in earnings estimates.
Upward revisions in estimates can have a powerful long-term effect on shares as large mutual and hedge-fund managers begin allocating capital into companies, demonstrating high levels of confidence in them despite the a slow-growth economy. Individual investors are an important part of this process as well, providing additional tailwinds by shifting into stocks that are getting the most attention and highest marks from the brokerage and analyst community.
That's why companies that saw the biggest upward revision in estimates during a very slow fourth-quarter earnings season are in position to see big capital inflows in the next few months, a factor that should have a powerful effect on shares.
Here is a list of nine stocks from the S&P 500 that have seen the biggest upward revisions in estimates after reporting fourth-quarter results. Some of them have already seen big gains, but with the trend still well in play, they are in position to continue moving higher as institutional and individual investors search for high-growth companies.
This is an incredible example of what can happen to a stock that sneaks up on the market with better-than-expected results and then sees big upward revisions in estimates. As you can see in the chart below, shares moved nearly vertically in late January, after reporting earnings that came in more than 200% ahead of expectations.
That led to sharp upward revision in the 2013 earnings estimates, more than doubling from 44 cents a share to $1.01 a share. The full-year 2014 estimate also surged, almost doubling after from $1.30 a share to $2.47, a share -- a bullish 144% earnings growth projection. Netflix isn't exactly a nice value at these levels, trading with a forward price-to-earnings (P/E) ratio of 185, but there are few stocks in the market with more momentum. Take a look at the incredible gain below.
DR Horton Inc.
The housing recovery is in full swing, with 2012 showing the first annual increase in home prices since the market peaked in 2006. And DR Horton has been in position to capitalize on this growth. That showed up in the homebuilder's strong fourth-quarter results from late January, posting earnings of 20 cents a share that were 43% ahead of expectations. This also put a nice bid into this year's earnings estimate, jumping 8% to 95 cents a share.
DR Horton currently trades at 25 times forward earnings, a premium to its 10-year average of eight. But with analysts calling for an annual growth rate of 22% in the next five years, the long-term outlook for this homebuilder is definitely bullish.
Risks to Consider: Shares frequently jump right after an earnings surprise and upward revision as first responders make quick trades, neutralizing a portion of a stock's upside potential.
Action to Take --> Estimates and actual earnings are the most important factors affecting the price of a company's stock. These nine companies delivered big earnings surprises that sent full-year estimates skyrocketing. Some have already seen big gains, but as long-term investors continue to shift into companies with strong earnings growth, shares are in position to continue gaining, particularly Netflix and DR Horton.