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3 Must-Buy Stocks on the Right Side of the Earnings Divide

How to play polarizing earnings-season results

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The market has boomed on a number of strong earnings results and positive forward guidance. But this earnings season’s results have been polarizing. Companies with strong earnings are seeing significant gains, and companies with poor earnings are getting punished. There has been very little middle ground for companies, and that’s what makes this earnings season so important.

Just look at FedEx (NYSE:FDX) and Family Dollar (NYSE:FDO), and you’ll see what I mean. FDX jumped 8% after announcing profits surged 76% year-over-year and total sales climbed 10% to $10.59 billion. FDO, on the other hand saw its stock drop 7% on the day it reported profits and sales that failed to meet analyst expectations.

This divide between winners and losers is increasing because we’re now nearing “peak earnings.” The financial crisis was a massive hit to earnings. So, the subsequent recovery years showed dramatic improvement on a year-over-year basis. But those types of growth rates were not sustainable, and the new year-over-year comparisons are getting tougher. Analysts are taking this into account and currently are expecting about 7% average growth for S&P 500 companies — down from the 15% expected just three months ago. Here’s an example of why earnings growth is slowing:

Company A had earnings per share of $1 in the quarters before the financial crisis. During the crisis, earnings dropped to 50 cents per share. Then, as the recovery took hold, earnings improved to 75 cents per share and back to $1 per share. That growth came from customers coming back — not from real company growth. Now that the company is looking at more normal growth rates and might post in the neighborhood on $1.10 per share, that 10% rise in earnings looks pretty pitiful compared to last year’s 33% rise.

Obviously, the key to being on the right side of the divide is to demand each of your portfolio holdings to have strong sales and profits that translate to earnings growth

Take the following for example:

Check Point Software Technologies (NASDAQ:CHKP). The company reported top- and bottom-line growth that trumped estimates across the board. Management announced that the company experienced exceptional performance across all of its key business metrics and was especially successful in its products and licenses segment as well as its software updates business.

As such, sales for the fourth quarter increased 12% year-over-year to $356.8 million. This topped the consensus sales estimate of $355.6 million. Similarly, net income for the quarter climbed 16% to $159.8 million, or 75 cents per share. Excluding special items, adjusted earnings weighed in at 84 cents per share, trumping the consensus earnings estimate of 82 cents per share by 2%.

For the full year, earnings jumped 20% to $544 million, or $2.54 per share, and total sales rose 14% to $1.25 billion. This earnings announcement kicked off the trading week on the right foot, and I want you to add this conservative stock below $59.

Article printed from InvestorPlace Media,

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