Everyone’s a pessimist on Wall Street these days. Earnings season is fading in the rear view, and while the results aren’t negative as some feared, they’re only better than last year’s earnings by roughly 2%.
The key takeaway here is weak earnings make stocks more expensive. The S&P 500 now trades at 22 times net profits (17 times operating income) for the last year, significantly higher than the historical average of 15.5%.
Nevertheless, that doesn’t necessarily mean take your profits and run. There are still a few gems out there that are gaining revenue, beating earnings estimates by several times analysts expectations and have considerably more growth in the pipeline.
These three stocks are increasing earnings, have excellent cash flow and minimal debt to keep a growth or value portfolio strong:
3 Good Stocks to Buy: American Airlines (AAL)
Price-to-earnings ratio: 8.9
Forward P/E: 5.7
American Airlines (AAL) recently beat the Street’s earnings estimate by 2 cents, recording $1.73 a share when analysts were expecting $1.71 — not a huge earnings beat, but a beat nonetheless.
The real growth will begin in the current quarter, as American is slated to grow a whopping 46% followed by 77% in the quarter following.
Sure, airline stocks are taking a beating now and AAL stock is down nearly 25% this year, but that doesn’t mean jump out of the fray. Jim Corridor, and airline equity analyst for S&P Capital IQ, believes energy prices are the main factor to blame for the pullback in airline stocks.
Take jet fuel, for example; this was the biggest expense for airlines, but the price of fuel fell by a third since August. While some airline executives using their savings to reduce debt and put cash back in shareholders’ pockets, other airlines are using those savings to fund growth.
American Airlines is one of those companies.
As Southwest Airlines (LUV), one of AAL’s biggest competitors, increases its capacity, AAL management is responding in kind. Analysts believe this will hurt the airlines’ revenue performance in the near term but it won’t be a death knell to financial stability over the long term.
AAL’s underlying business is still solid and it’s only a matter of time before airlines return to profits. For the full year, AAL growth expectations are a massive 146%. Take into account that AAL generates $3.60 per share in operating cash and there’s more money in this company than investors may realize.
Those gains are from reports of a record summer for airlines, which expects 2.4 million passengers a day from June to August.
I’m not hesitant at all to say that dip in price puts AAL among the good stocks to buy now.
3 Good Stocks to Buy: Gilead Sciences (GILD)
P/E: 13.4
Forward P/E: 10.7
Gilead Sciences (GILD) is absolutely killing it in both earnings and revenue. To top it off, GILD stock performs like a growth stock but trades for a value. GILD stock is up 47% in the last year and its price to earnings is well below the S&P 500 average of 15.
But of course we have to acknowledge the lackluster HCV sales that put a hurting on GILD. Even declining sales, however, don’t look like they’ll even dent GILD’s estimated $12 billion for the current quarter.
And when it comes to cash, GILD has a plenty to throw around.
Gilead has more than $10 billion in cash, $5.7 billion in current liabilities, and generates $3.88 per share in operating cash flow — more than GILD’s most recent quarterly earnings of $2.94, which obliterated the consensus by almost 30%. Analysts are increasingly bullish on the stock, too, and EPS for the current year continues trending up from $9.53 to $10.78 in three months’ time.
If we look at quarterly growth year on year, GILD grew earnings by 95%, and this year GILD will grow 34% more.
This isn’t pure speculation. GILD has some major promising drugs in the pipeline, such as GS-5745, a treatment for ulcerative colitis and gastric cancer; JAK inhibitor, a drug for pancreatic cancer now in Phase 3 studies; and Zydelig for tumors and blood cancers.
A similar drug, Imbruvica, by a competitor is worth $40 billion in the market, and if Gilead can effectively diffuse safety concerns over its own product, it’s easy to imagine Zydelig could fetch as much in the market.
The icing on the cake is Gilead’s dividend yield of 1.5%. Sure, it’s not huge by any means, but it’s added value to a stock that I suspect will perform remarkably over the next year or so.
3 Good Stocks to Buy: Marathon Petroleum (MPC)
P/E: 9.1
Forward P/E: 10.7
Marathon Petroleum (MPC) beat estimates by 12.9% with $3.24 per share. This isn’t a one-time occurrence; MPC beat earnings the last four quarters by as much as 108%, and EPS estimates for the current and next year are skyrocketing.
But let’s talk cash: MPC’s balance sheet reflects enormous growth of 33% in total cash flow, enough to keep spending at its current rate for the next four quarters. When it comes to debt, MPC’s cash and cash equivalents cover 31% of all of the company’s debt.
The outlook given by MPC management for the next quarter is also positive. While the oil industry expects a drop of 51% this year, MPC will grow by 25%. Compared to the same period a year ago, Marathon’s profits surged an incredible 300%.
The acquisition of Hess should continue powering MPC as it now has one of the largest convenience chains in the U.S., and earnings estimates have trended up from $8.95 to $11.27 for its current fiscal year.
With a high target of $145 and a low of $95, there’s plenty of wiggle room for Marathon to reach higher limits this year, and is one of the best bets you can make in the oil industry.
As of this writing, John Kilhefner did not hold a position in any of the aforementioned securities.
