Why investors should keep their eyes on earnings
In a market that’s always unpredictable, you should keep your focus on positive earning reports, says a Canadian analyst who has two buys.
If it’s not one thing, it’s another.
The Greek debt crisis kicks one group of stocks downstairs. Slowed-down manufacturing in China does the same to Canadian commodities.
But none of us can anticipate the outcome of Europe’s debt muddle, much less do anything to solve it.
And if you can speed up manufacturing in China, more power to you.
Since individual investors have no control over these momentous events, the best course is to stick to the basics.
Investors can control the stocks they choose. And there is no sounder basis for making that choice than a strong earnings report, says Ms. Jennifer Dowty in Investor's Digest of Canada.
Every earnings season, we get a fresh glimpse of each company’s report card. Thus we can tell which stocks will get an immediate boost, and which have laid the groundwork for long-term earnings growth.
Ms. Dowty picks out two recent earnings winners to recommend, both lesser-known but up-and-coming stocks.
A positive surprise
Three things can happen when a company reports its earnings. First, those earnings can be just about as good, or bad, as expected and the market will basically shrug,
Two, they could be better than expected — a “positive surprise” — and the share price could get a nice ride up the charts.
Third, they could be worse than expected, and the market will almost invariably punish the stock.
But what does the earnings report tell us about the future of the company? Will a good earnings glow last for more than a short time?
With this in mind, Ms. Dowty not only looks at earnings reports, but also at analysts’ forecasts. Corporate earnings are the motor that drives the stock market, and the one indicator that analysts value most.
She singles out two stocks, one in construction and one in mining.
Stellar results
Across the western provinces, Seacliff Construction (TSX-SDC) has a weighty presence. In operates in 24 locations with three main business arms — Dominion Construction, Canem Systems and the Broda Group.
Dominion is a general contractor handling big construction jobs (like the new football stadium in Winnipeg). Canem is a contractor in electrical and data systems. And Broda is another construction company.
The last time it reported, Seacliff turned in “stellar” fourth quarter results. It beat earnings expectations “by a wide margin,” Ms. Dowty reports. The balance sheet showed over $80 million in cash. The order backlog is an equally stellar $492 million.
The company duly raised the dividend from $0.20 to $0.24.
Seacliff will report again next week, on May 12. In the meantime, the stock has risen by more than 25 per cent this year so far. It has levelled off a bit in recent weeks, but analysts like its prospects.
Of eight analysts surveyed, all have “buy” recommendations, with an average 12-month target price of $16.78. The stock is trading at $13.95 and yielding 1.4 per cent.
Tremendous growth
Also in the west we find Imperial Metals Corp. (TSX-III). Its key assets are in the Mount Polley open-pit copper and gold mine and the Huckleberry open-pit copper and molybdenum mine, both in B.C.
It has turned its focus on a project with great promise, the Red Chris property, also in B.C. So far the news has been good and an aggressive drilling program for 2010 is under way.
Imperial’s results are not as clear-cut as Seacliff’s. The third quarter results were strong. Copper and gold production was far better than expected, while operating costs were lower than anticipated, reports Ms. Dowty. Revenue and cash flow also ran ahead of expectations.
In short, the company earned a lot. But its final results for 2009 were so-so at best, reflecting an uneven year overall, not an unusual occurrence for an exploration and development company.
But the three analysts who cover the stock all have “buys” on it, says our author. Yet two of the analysts may have to raise their target prices, which have already been toppled.
The best is yet to come, Ms. Dowty tells readers in Investor's Digest of Canada. “Year 2010 will be one of tremendous growth for the company. Earnings are forecasted by analysts to more than quadruple from 2009 levels.”
In mid-April, the stock was up a “staggering” 46 per cent this year. It has slipped down a bit since then. It trades at $18.90, with no dividend.
The stock market will never be immune to events over which most of us have no control whatsoever. So we should keep it simple, in this analyst’s opinion. Companies that earn money will earn us money.
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