Where Upside Surprises Could Be Percolating

 | Jan 13, 2014 | 7:15 AM EST
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Over the weekend we examined some names with the potential to miss earnings, based on recent analyst cuts to fourth-quarter earnings-per-share estimates. Moving to the sunny side of the street, today we'll troll for names that could deliver a meaningful upside surprise -- which, of course, could then drive near-term price appreciation.

My same distant early warning (DEW) system works in both directions. Where estimates are rising, especially after the close of the quarter, we can surmise that analysts are picking up on good things that have happened during the quarter. The table below lists stocks with more than $500 million in market capitalization whose consensus targets have risen by more than 20% in the past four weeks.

A few that have tickled my fancy are Valero (VLO), Pharmacyclics (PCYC), and Phillips 66 Partners (PSXP).

Valero is a "downstream" name, meaning a refiner and marketer, with emphasis on refining. Refining is a spread business -- the "crack spread" is the margin between the price of crude feedstock and the market price of gasoline and other co-products. Spreads can shift notoriously quickly, and right now they are expanding. The market has noticed this, and Valero shares have risen significantly in the last three months. Still, there is high potential for upside to raised estimates, and to guidance, for continued good times.

Pharmacyclics is a Silicon Valley-based biopharma name focused on cancer and "immune-mediated" diseases. Unlike startup biotechs, this company has a strong product portfolio, and is expected to generate $213 million in revenue for 2013. Earnings for the year are expected at $48 million. However, the model still demonstrates embedded volatility -- look at the stock in December, when it plunged 23%, then rallied 30%, in the course of two weeks. Pharmacyclics announced positive clinical trial results, which drove the recovery. This name will always trade wildly, but if earnings surprise you, will do OK.

Phillips 66 Partners is a recent LP spun out of Phillips 66 (PSX) that is a container for a number of midstream assets, such as pipelines and distribution terminals. The company was put into a master-limited-partnership format for tax reasons, of course, but it should be able to produce stable and growing cash flows over time. The dividend is low-ish for their space, but should grow over time with accelerating earnings.

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volatility is quite low here, and we could see some downsides here in the short term. ...
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this chart is showing great bullish signs here, we like this to take out the old high shortly. ...



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