We’re moving deeper into the third-quarter earnings season, which means Wall Street is getting busier, too. Just this week we will see 165 S&P 500 companies and 12 Dow companies report their latest earnings results.
So far, this earnings season is going well. According to FactSet, 72% of S&P 500 companies that have announced have reported a positive earnings surprise and 70% of S&P 500 companies have reported a positive revenue surprise.
Just as important: Wall Street is rewarding companies that post strong earnings and sales results and punishing those that report disappointing results and soft earnings guidance.
Not surprisingly, the companies’ reports and Wall Street’s reactions to them is impacting their grades in Portfolio Grader.
Case in point: Netflix, Inc. (NASDAQ:NFLX).
As I touched on in our Market 360 issue this past Thursday, analysts were expecting revenue of $7.58 billion and earnings per share of $2.17 for the third quarter in fiscal year 2022. They were also looking for 1.1 million paid subscribers additions for the quarter, after losing subscribers for two consecutive quarters.
The company reported revenue of $7.93 billion and earnings per share of $3.10 during the third quarter – solidly beating analysts’ estimates. Furthermore, Netflix added 2.41 million subscribers, topping expectations. Company management also said they expect to add 4.5 million subscribers during the fourth quarter.
Following Netflix’s strong earnings report, the stock was upgraded from a D-rating (Sell) to a C-rating (Hold) in Portfolio Grader.
As I said last week, fundamentals play a key part in how I rate stocks. My Portfolio Grader measures eight key characteristics: Sales Growth, Operating Margin Growth, Earnings Growth, Earnings Momentum, Earnings Surprises, Analyst Earnings Revisions, Cash Flow and Return on Equity. Regarding Netflix, its Earnings Surprise rating jumped from a C-rating to an A-rating, while its Analyst Earnings Revisions rating was revised upward from a D-rating to a C-rating.
Of course, Netflix wasn’t the only stock upgraded recently. After taking a close look at the latest data on institutional buying pressure and each company’s fundamental health over the weekend, I decided to revise my Portfolio Grader recommendations for 102 big blue chips. You can get a quick peak at the first 10 of the 27 companies that were upgraded from Sells to Holds in the chart below. I should also add that 26 stocks were upgraded from a Hold (C-rating) to a Buy (B-rating). Chances are that you have at least one of these stocks in your portfolio, so you may want to give this list a skim and act accordingly. For the full list of 102 stocks, click here.
|Ticker||Company Name||Total Grade|
|ASML||ASML Holding NV ADR||C|
|BAC||Bank of America Corp||C|
|DIS||Walt Disney Company||C|
|FMX||Fomento Economico Mexicano SAB de CV Sponsored ADR Class B||C|
|GM||General Motors Company||C|
|GOLD||Barrick Gold Corporation||C|
As I said, earnings are workings, which means that it’s important to be invested in fundamentally superior stocks this season. So, the stocks that post strong earnings, sales and provide positive guidance should emerge as the market winners in the coming weeks and months.
I fully anticipate my Growth Investor stocks to be among these winners. My average stock is characterized by 64.2% annual sales growth and 473.9% annual earnings growth. By comparison, the analyst community is expecting the S&P 500 to post 8.5% annual third-quarter sales growth and only 1.6% annual third-quarter earnings growth.
The reason why my Growth Investor stocks are poised to beat the S&P 500?
The fact of the matter is the energy sector will post the best earnings this season. We’ll talk more about what I expect from the energy sector in this Saturday’s Market 360 article but let me say now that analysts expect the energy sector to post triple-digit earnings growth – and strong earnings could get energy stocks firing on all cylinders as Wall Street grows more fundamentally focused.
P.S. Worried about gas prices? Here’s some bad news: Gas prices could soar even higher in the months ahead –with Goldman Sachs believing we could see oil soar past $200 a barrel.
I just stepped forward to help people navigate a world of $200 gas. Get your portfolio ready with my latest picks.
The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owns the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below: