Investors looking for stocks to buy ahead of third-quarter earnings season likely did well for themselves. U.S. equities have rallied nicely on the back of strong results, and there has been no shortage of earnings winners.
Tesla (NASDAQ:TSLA) and Intel (NASDAQ:INTC) are among the widely-held names that rallied nicely after strong earnings reports. Big banks, led by Bank of America (NYSE:BAC) and JPMorgan Chase (NYSE:JPM) finally broke out. Those earnings winners helped lead broad market indices to all-time highs after a sell-off at the peak of Q2’s earnings season.
But the following three stocks had the most transformative, and even most important, earnings reports of the last few weeks. Given big gains after those reports, an investor might not think they are the best stocks to buy right now. In some cases, that might be true, as all three names might need to settle down after big rallies.
Still, from a long-term standpoint, the bull cases here have been significantly strengthened. And if these companies can deliver going forward as they did in the third quarter, there should be more gains ahead.
3 Big Earnings Winners: General Electric (GE)
As I wrote ahead of the release, the third-quarter earnings report from General Electric (NYSE:GE) was enormously important. GE stock was scuffling, even with a rally off August lows. Patience toward the company’s turnaround was running thin.
Free cash flow from the industrial business was guided to be zero, plus or minus $1 billion. Combined with long-running concerns about the company’s GE Capital unit, there was a very real case that GE stock was overvalued even in the single digits.
The company’s third-quarter earnings beat doesn’t fix all of GE’s problems at once. There still is a long way to go. But there’s real reason for optimism here, with the report helping drive General Electric stock up 29% over the past month. Guidance for industrial free cash flow was raised for the second straight quarter. The struggling Power business is showing signs of stability. And earnings had none of the negative surprises that have dominated past releases.
On the whole, the release seems to confirm that the hoped-for turnaround under CEO Larry Culp is making progress. And for investors who believe the rally will continue, there’s one key data point to keep in mind. GE stock closed at $11.62 on Oct. 1 of last year — the day Culp took over. It ended Friday’s trading seven cents cheaper. There’s more upside ahead if General Electric can keep delivering.
Among stocks with a market capitalization over $50 billion, there have been no better stocks to buy than Target (NYSE:TGT) over the past twelve months. TGT stock has gained 83%, ahead of the 76% return in second-place ServiceNow (NYSE:NOW).
Post-earnings rallies have been a big reason why. TGT stock gained 7.8% after the first quarter report in May, 20.4% after Q2 earnings in August, and another 14% after the third quarter release last week. As a whole, the takeaway is clear: Target is a real competitor to Walmart (NYSE:WMT) and Amazon (NASDAQ:AMZN) at the top of U.S. retail.
The worry at this point might be that the gains have gone too far — but there’s a case they can continue. A 18.5x multiple to next year’s consensus earnings estimate is notably higher than Target stock has received in recent years. But it’s still four turns below the multiple assigned Walmart stock. On an earnings basis, TGT still trades at a discount to Dollar General (NYSE:DG), whose growth is not as impressive and whose omnichannel opportunity isn’t as large.
In other words, earnings so far this year strongly suggest that Target is among the country’s best retailers. But even after market-beating gains, TGT stock isn’t yet valued like it.
Stage Stores (SSI)
While TGT has been the biggest winner among large-cap names, Stage Stores (NYSE:SSI) is the biggest earnings winner, period. SSI stock more than doubled in two sessions last week. Combined with gains heading into the release, Stage Stores stock now has gained a stunning 505% in the last three months. No stock in the entire market has done better.
As staggering as the rally seems, it makes some sense. At levels below $1 earlier this year, SSI’s market cap was a tiny sliver of its enterprise value. A restructuring, and a stock price of zero, seemed a very real possibility. The company’s only hope seemed to be converting its legacy small-format department stores to its off-price concept, created by the company’s acquisition of Gordmans Stores out of bankruptcy in 2017.
A sizzling 17.4% same-store sales increase in the third quarter suggests that strategy is working out even better than management could have expected. And with a full conversion to Gordmans on the way, there’s more room for conversions to drive growth going forward.
Even after the gains, SSI might still be cheap. Stage Stores still has a market capitalization around $135 million. Net debt should end the year around $240 million, putting SSI’s enterprise value at $375 million. That’s about 10x the midpoint of Adjusted EBITDA guidance for $35-$40 million this year.
That’s not an onerous valuation. And if Stage Stores can keep growing those profits and start paying down debt, the stock still could be cheap even after the torrid gains. Indeed, on this site just last week, Luke Lango called out SSI stock as one of five lottery ticket stocks to buy. He argued the upside could go to $9.50 — still more than 100% Friday’s close of $4.66.
As of this writing, Vince Martin has no positions in any securities mentioned.