A lot can happen in a year. Take these three companies: Allstate (NYSE:ALL), AOL (NYSE:AOL) and Sonic (NASDAQ:SONC). This time last year, each of these stocks was at the bottom of the barrel, earnings a D- or F-rating in my Portfolio Grader tool.
However, over the past 12 months, these companies have been working overtime to turn things around, and their efforts have paid off. Now, they’re A-rated buys, receiving top marks for fundamental strength and buying pressure. And investors have taken note: These stocks have gained an average 71% over the past 12 months.
So here’s the million dollar question: Is there further upside ahead for these “rags to riches” stories?
Allstate is second only to privately-held State Farm when it comes to personal lines insurance in the U.S., which includes auto, home and life. While Allstate was originally part of Sears (NASDAQ:SHLD) it was spun off in 1993 and has grown into a company that serves nearly 16 million households and has $125.6 billion in total assets.
At the beginning of 2012, ALL was a D-rated sell. The company had incurred $3.4 billion of catastrophe losses during the second and third quarter of 2011 and was still smarting from the sting. Since then, the company has improved its balance sheet, especially in terms of earnings growth, cash flow and return on equity. As investors realized this, buying pressure has improved so much that ALL now receives an A for its Quantitative Grade.
However, this buy recommendation does come with a grain of salt: When Allstate reports fourth-quarter earnings after the closing bell on February 6, analysts expect the insurance company’s profits to plunge 105% compared with the same quarter last year. This is on par with the rest of the industry, which is headed towards a 100% drop in earnings. Even so, Allstate does have a history of blowing analyst estimates out of the water: The company has posted at least a 27% earnings surprise the past four quarters. So keeping that in mind, ALL is an A-rated buy.
AOL has undergone a major facelift since it was cast aside by Time Warner (NYSE:TWX) in 2009. While AOL was once the king of the internet, with over 30 million members, that number has since imploded to 2.9 million. So it’s not surprising that as of last January, this was a D-rated stock.
But the company has kept busy over the past few years, shifting is focus by buying out content properties like TechCrunch in 2010 , The Huffington Post in 2011, and Moviefone, Patch and MapQuest to name a few. In the past year, AOL has improved its ability to monetize these websites, so we’ve seen substantial improvements in operating margin growth, analyst earnings revisions and earnings momentum.
AOL is due to report earnings at the end of the month, and as I mentioned in an earlier blog post, I can’t wait. Analysts have steadily revised their estimates up over the past three months; the consensus now calls for 74% bottom-line growth. But AOL also has a strong earnings surprise history, so I expect this to be another blowout earnings announcement. AOL is also an A-rated buy.
Sonic is the all-American drive-in fast food chain that has been around since the 1950s. In January 2012, the company was suffering from anemic same-store sales growth and was struggling with higher food and packaging costs. At the time, analysts were deriding the company for having a generic menu and stale growth prospects. However, the company managed to prove the bears wrong by revamping its marketing campaign and successfully updating its menu.
Last summer, the company piqued investor interest by launching a $40 million stock buyback program. But this is just the beginning, going forward, Sonic has committed to a multi-layered growth strategy designed to return value to shareholders. So it’s no wonder that buying pressure started to firm up starting in September, and it hasn’t backed down since.
Shares of SONC gapped up after the company announced solid results for the first quarter. The company continued to open new locations and reported a 3% jump in same-restaurant sales. Meanwhile, net income advanced 11% to $6.1 million, or $0.11 per share, matching the consensus estimate. And things should only get better from here: This quarter, Sonic Corp. is expected to post 67% earnings growth—way above the 26.2% growth forecast for the rest of the restaurant industry. SONC is an A-rated buy.