7 Surprising Stocks to Buy Now for Peak Earnings

The first-quarter earnings reports for S&P 500 companies are pretty much in the books as I write this. The results, for the most part, were overwhelmingly positive, which leaves investors with the difficult task of picking stocks to buy.

Fact A: According to Factset Research Systems Inc. (NYSE:FDS), with 91% of the S&P 500 companies reporting earnings in Q1 2018, 78% delivered a positive earnings surprise while 77% reported a positive revenue surprise. If this holds up, Q1 2018 will be the most surprising quarter of earnings results since Factset started keeping track in 2008.

Fact B: The blended earnings growth rate (actual plus estimates) for S&P 500 companies in the first quarter is 24.9%, the highest rate since Q3 2010. Add to this the fact ten sectors have a higher earnings growth rate today than at the end of March thanks to Fact A, and you have the makings of an earnings tsunami.

To save you the work of digging through all of the data, I’m going to do it for you. By the end, you’ll have seven surprising stocks to buy from seven different sectors. But before you run out and buy the stocks on my list, remember that some experts are suggesting we’re currently experiencing peak earnings; the future’s not going to be nearly as rosy.

A crystal ball, I don’t have.

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Surprising Stocks to Buy Now: Amazon.com (AMZN)

Hey, I’m as big a fan of Jeff Bezos and Amazon.com Inc. (NASDAQ:AMZN) as anyone, but how on earth did the world’s biggest e-commerce company beat analyst estimates by 157%?

I’ll admit I love using analysts for sound bites in my coverage of public companies but there’s something definitely wrong when a business on as big a roll as AMZN gets a Q1 2018 estimate of $1.27, 21 cents lower (!?!) than the year before.

Are these men and women not reading Amazon’s financial reports?

If you are an Amazon shareholder, the one thought you should have after examining its first-quarter results is: Please keep losing money internationally — the unit had a $622 million operating loss in the quarter, 29% higher than a year earlier — because we know what happened with its North American e-commerce business after losing lots of money; it’s now making lots of money.

Throw in its AWS business which grew operating margins by 140 basis points year-over-year while pulling down $1.4 billion in operating profits and I’m not sure there’s an argument against owning its stock for the next 10-30 years.

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Surprising Stocks to Buy Now: Occidental Petroleum (OXY)

How do you know that oil prices are rising? Oil and gas producers are handily beating earnings estimates and share prices are hitting 52-week highs. Occidental Petroleum Corporation (NYSE:OXY) reported earnings per share May 9 of 92 cents, 30% higher than analyst estimates. On the top line, Occidental had revenue of $3.83 billion, 3.5% higher than analyst expectations and 29% higher than a year earlier.

That’s what happens when a barrel of oil goes from $40 to over $70 in less than a year. Even better, if you’re an OXY shareholder, the company upped its production guidance for 2018 to as high as 665 million barrels of oil equivalent per day (Mboe/d).

Making money at less than $70 a barrel — much less if oil prices move even higher, which many expect to happen this summer — Occidental will be rolling in the dough.

“Once we achieve our remaining milestones we will be well-positioned in the future with the cash flow necessary for our $40 oil price business sustainability and $50 oil price business growth scenarios,” CFO Cedric Burgher said. “But we will continue to operate our business to reduce those breakevens even further.”

Bring on $80 oil.

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Surprising Stocks to Buy Now: Tripadvisor (TRIP)

If you bought $1,000 of Tripadvisor Inc (NASDAQ:TRIP) stock a year ago, today you’d have a $68 gain for your troubles. However, if you bought $1,000 of TRIP stock in November, you would have a $610 gain, or almost 10 times the paper profit. Needless to say, the past 12 months have been a bit of rollercoaster ride for TRIP … but if its latest earnings are any indication, the next 12 months might be a little smoother.

The travel site — it actually has a bunch of different sites in addition to TripAdvisor — was expected to earn 16 cents a share in the first quarter but reported $0.30, 88% higher than the estimate.

“In February we outlined our expectation of approximately flat consolidated adjusted Ebitda in 2018 compared to 2017,” stated its Q1 2018 press release. “Our solid start to the year makes us more positive, and we now expect to deliver year-over-year consolidated adjusted EBITDA growth in 2018.”

That right there is the big driver of TRIP stock since February. While its hotel segment is continuing to see lower revenue, its non-hotel business, which includes restaurant reviews and vacation rentals, is experiencing significant growth.

I’d continue to follow the non-hotel segment’s progress. That’s what will drive TRIP stock in the future.

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Surprising Stocks to Buy Now: Newell Brands (NWL)

As we’ve seen from Q1 2018 earnings reports, companies that beat estimates are given very little love and those that barely miss are pummeled. That’s exactly what’s happened to Newell Brands Inc (NYSE:NWL) when it reported earnings May 4. Analysts were expecting earnings per share of 26 cents; Newell came in at 34 cents, 31% higher than the estimate. Yet NWL barely moved.

The likely culprit? Analysts were expecting revenue of $3.039 billion, Newell was short by $22 million. Factor in the company is in the middle of rightsizing its business in terms of the number of brands it owns and investors see a lukewarm growth story.

However, Newell’s accelerated transformation plan is far from finished. In its Q1 2018 press release, it announced that it would also potentially sell its Jostens and Pure Fishing businesses if the right offers came along.

“The divestiture process is well underway and the company expects to complete all transactions by the end of 2019,” stated Newell’s Q1 2018 press release. “In 2020, the Company expects net sales of approximately $9.5 billion and normalized operating margin greater than 15 percent.”

Trading at a P/S and P/B that’s lower than it’s been in recent years, I’d consider a small position with an eye to adding to it once it’s clear the fine-tuning of its portfolio is working.

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Surprising Stocks to Buy Now: Cigna (CI)

Health insurer Cigna Corporation (NYSE:CI) beat Q1 2018 earnings by 21% — its EPS excluding one-time items was $4.11 compared to the $3.39 consensus — prompting the company to up its EPS outlook for 2018 to $13.05 a share at the midpoint from its previous guidance of $12.65.

On the horizon, Cigna’s working on acquiring pharmacy benefits manager Express Scripts Holding Co (NASDAQ:ESRX) for $52 billion; investors are concerned the deal won’t get approval from anti-trust regulators.

Cigna CEO David Cordani believes the acquisition will help it cut medical costs for its customers. In 2017, medical costs rose by 3%. It expects those costs could rise by as much as 5% in 2018. It would like to get medical cost increases down to CPI inflation.

In the first quarter, membership in its health care plans increased by 3%. It now has 16.2 million members. With revenues rising almost double digits with healthy increases in earnings, with or without Express Scripts, I see Cigna doing just fine.

Buy on current weakness.

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Surprising Stocks to Buy Now: Boeing (BA)

I was one of many in the business media writing about Boeing Co’s (NYSE:BA) stellar first-quarter earnings April 25. Boeing delivered adjusted earnings per share of $3.64, 41% higher than the consensus estimate. While we’re on the subject of beats, its free cash flow was $2.74 billion, 84% higher than analyst expectations.

“Well it’s not every day that a mega-cap company beats consensus by 40 percent,” Robert Stallard, an analyst with Vertical Research Partners said in a note to clients. “The wall of cash that the company is generating makes it hard to be absent from the stock.”

Indeed.

Based on an enterprise value of $196.4 billion and a trailing 12-month free cash flow of $12.6 billion, Boeing has an FCF yield of 6.4%, a perfectly decent yield for a company that’s firing on all cylinders at the moment. Here’s what I had to say about Boeing in April a couple of weeks before earnings:

“Now that I’m back on Boeing wagon, I do believe that Boeing stock could deliver 20%-25% compound annual growth over the next five years,” I wrote April 10. “If it does, a $1,000 stock price is not out of the realm of possibility.”

After its strong first quarter, I have no doubt it’s possible by 2023.

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Surprising Stocks to Buy Now: Zions Bancorp (ZION)

Zions Bancorp (NASDAQ:ZION), the Salt Lake City-based regional bank with operations in 11 states and $66 billion in assets, announced first-quarter results April 24 that saw it beat on both the top and bottom line. In terms of earnings, analysts were expecting 83 cents a share; Zion delivered $1.09, 31% higher than the consensus. On the top-line, Zion’s Q1 2018 revenue was $684 million, 9.6% higher than a year earlier and $18 million above what analysts were expecting.

Heading into the second quarter, Zion, like most U.S. companies, is paying less tax. Typically, the bank has an effective tax rate in the mid-to-low 30% range; in 2018 it should be around 23%, adding a bit more oomph to future earnings reports. Zions, which services the western portion of the U.S., is benefiting from a strong economy. It expects this to continue for the remainder of the year.

A quick look at most of its major metrics in Q1 2018 compared to a year earlier paints a very pretty picture. Its return on average assets in the first quarter was 1.45%, 57 basis points higher than a year earlier and almost double what it was in the fourth quarter. In terms of its tangible return on average tangible common equity, it was 15.5%, well above the 8.8% return it generated in Q1 2017.

Virtually everywhere I look I see a business that’s prospering. As a shareholder, that’s all you can ask for.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned

Surprise In Mass. Primary: 21 Percent For Single-Payer Candidate Berwick

Note to politicians: Backing �Medicare for all� is looking less and less like electoral poison. If, deep in your heart, you believe American health care would be better off with a Canadian-style, single-payer system, you might now consider coming out of the closet. (In Democratic primaries in blue states, at least.)

 

 

That�s my suggested takeaway from the striking Massachusetts Democratic primary showing of Dr. Donald Berwick, who rocketed from near-zero name recognition among general voters to 21 percent at the polls. Catch him saying forcefully in the video above: �Let�s take the step in health care that the rest of the country hasn�t had the guts to take: single payer. Medicare for all.�

Now, Vermont not only has a mainstream politician who backed a single-payer system � Gov. Peter Shumlin � it�s actually translating the idea into practice as we speak. But let�s put it this way: This seems to be the first time that a candidate in a mainstream political party in a state that is not a verdant utopian duchy has run on a single-payer platform. And though he did not defeat the longtime familiar faces, he did surprisingly well.

Of course, we knew that Massachusetts voters tend to like the idea of single payer. As recently as 2010, 14 fairly middle-of-the-road districts voted in favor of a non-binding ballot measure calling for �creating a single payer health insurance system like Medicare that is comprehensive, cost effective, and publicly provided to all residents of Massachusetts.�

Analysts projected that the results meant a statewide majority in support of a single-payer system. The single-payer idea had polled well in non-binding ballot measures before, as well. But now we�ve seen that sentiment translated into support for a candidate.

Other politicians, including President Obama, have backed the general idea of a single-payer system, but they always add a �but,� said Dr. Steffi Woolhandler, who helped found Physicians for a National Health Program.

�And the �but� usually has to do with the political situation,� she said. �But it�s actually important to say what�s the right thing to do and to really work toward the right solution, and that�s what Don [Berwick] has been willing to do, to say, �We need single payer and skip the �but,� let�s just say we need single payer and that we need to start working toward it.��

Will Berwick�s strong showing change the playing field for other candidates? Dr. Woolhandler says yes: �Politicians understand votes. Unfortunately, they also understand money. But they do understand votes, and I think other politicians will see that voters are behind the idea of single payer.�

I asked Dr. Berwick about the reaction to his single-payer position in his many campaign-season travels, and he said the biggest surprise was how positive the response had been from voters who would likely not call themselves progressives. They either already agreed with the idea, he said, or responded instantly after one sentence of explanation with, �That sounds right to me. Let me tell you my story.�

�I remember a carpenter in Hingham,� he said. �I don�t think he would have said he was a progressive � he was a somewhat older carpenter struggling to make ends meet, sitting on a sofa at a gathering, a meet-and-greet, and I started talking about this, and I guess � embarrassingly, to me � I was expecting some pushback. But he immediately said, �I�ve got to tell you a story.� And he told me about his struggle to get health insurance.

�He very carefully went through the policy options, he had picked one that had a maximum deductible that was pretty stiff, and he was ready to swallow it. And he did, he signed up for that plan. And then, the problem was that he had three major illnesses the following year. And he discovered � to his dismay � that the deductible did not apply to the year, it applied to each separate episode. So this guy, who�s working with his hands and trying to just get through and have his family�s ends meet, suddenly found himself tens of thousands of dollars in debt, because of the complexity [of health insurance.] And he said, �Enough of this!� He immediately understood and was fully on board, and that kind of experience has been pretty constant for me.�

Overall, Dr. Berwick said, �The response has been extremely positive beyond anything I would have anticipated. When I took the position, I had no polling information. I did it because I was looking at the state budget and seeing the erosive impact of rising health care costs on everything else we need to do. The numbers were stunning to me. I got briefed by the Mass. Budget Policy Center and they said � as I remember the numbers and have been quoting them � Parks and Recreation were down 25 percent, local aid was down 40 percent, higher education was down 30 percent.

You really can�t find a line item on the state budget that hasn�t been down in real terms in the last decade. Except health care is up 59 percent. That was the number that stuck in my mind when they briefed me. And as I went around the state and began to see what we need to do for schools, for transportation, for affordable housing � the term I�ve used, and it�s a bold term but it�s confiscation. It�s with benign intent, but health care is essentially taking away opportunities from public investment.�

�And then you meet with businesses and you get the same story. Businesses talk about how the continuing increase in health care costs is cutting opportunities for them to grow and develop their businesses. And then when you talk to labor � I remember meeting with the painters� union, and I asked the person who was hosting me to show me their paychecks, and the union wage scales over the past few years � you can see it right there in black letters � the take-home pay per hour has not been going up. What is going up is contributions to health care. So the logic was strong.

�And the reactions have been consonant with those data. People are very frustrated. They don�t understand their health insurance. They can�t read their policy. They know it�s not transparent. And they are suffering from vastly increased costs.�

No anti-Canada, anti-England backlash against what could be seen as an attempt to �nationalize� or �socialize� health care?

Not really, Dr. Berwick said. �Initially, you have to explain it, like, �What exactly do you mean? Medicare is a federal program.� If you say it�s Medicare for all, that doesn�t quite do it. But as I explain it to people, you take all the funds, put them in a single pool, make that pool publicly accountable, constantly subject to scrutiny and redefinition, stop the paperwork, stop the complexity, that could save 10 percent of the total bill over the first couple of years.�

�People do have questions, like, �Is this a government takeover of health care?� And you explain, �No, no, no. It�s the same delivery system, your doctors and hospitals, this is not nationalization or the state taking over care, but it is a single payment system. So I would say, the reaction to this has been stunningly positive. Could this be catalytic? I certainly hope so. I�d hate to see Vermont lap Massachusetts on being the first to show what a rational payment system looks like.�

Neither of the Massachusetts primary winners � Democrat Martha Coakley and Republican Charlie Baker � backs a single-payer system, so it�s actually pretty well guaranteed that Vermont is going to lap Massachusetts in the single-payer realm.

But perhaps the question is whether Vermont and Massachusetts will follow the pattern of gay marriage: The Vermont Supreme Court broke the ice in late 1999 with its decision on �civil unions,� but it was � arguably � the 2003 decision by the highest court of Massachusetts that set gay marriage on the road to the big-time.