Rules of the Game: Sizing Up the Bottom Line

 | Feb 07, 2013 | 11:00 AM EST  | Comments
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If you are holding individual stocks -- and that's certainly not required of every investor, since ETFs offer a perfectly acceptable way of spreading risk -- it's wise to incorporate earnings estimates into your analysis.

For an example, one large-cap that's expected to grow earnings at a double-digit rate this year is Valeant Pharmaceuticals (VRX), which makes treatments for nervous-system and cardiovascular disorders. Earnings are due Feb. 28 before the open -- and, for the full year, Valeant is expected to deliver income of $4.50 per share, up 54% over 2011. Analysts have pegged 2013 earnings at $5.62 per share, which would mark another 25% gain from last year's expectations.

The company has been growing through acquisition. This week, it closed its purchase of Russia-based specialty pharmaceutical maker Natur Produkt International for around $163 million. Natur Produkt sells cold remedies and other products in Russia and other Eastern European markets.

Other fundamental data look promising, as well: Yearly revenue rose in each of the past three years, and return on equity is a solid 21%. The longer-term prospects likewise look good for Valeant, although traders may wish to avoid the stock right now, as it's extended from key moving averages. For investors more comfortable buying on the dip, wait for a pullback to the 50-day or even 200-day line, and watch for support at one of those moving averages.

Another large-cap with good earnings estimates is LinkedIn (LNKD), a social-networking company that went public at $45 in May 2011. Shares closed Wednesday at $125.77 ahead of its fourth-quarter report, which is slated for Thursday after the close. The company is expected to earn $0.22 per share in the quarter, and $0.72 per share for the year -- the latter of which would mark a 106% year-over-year increase. For the coming year, analysts see another earnings gain of 78%, to $1.28 per share.

So how exactly is LinkedIn making money, since so many people (including myself) use the site for free? Premium services for job-hunters and job listings account for the revenue. When the company reports Thursday, analysts expect to see international as a key growth driver.

Given the recent market-wide rally, it's not surprising to see LinkedIn, Valeant and many other stocks extended beyond key moving averages. If you're seeking value names, LinkedIn is another stock you may wish to continue watching for pullbacks to moving-average support.

For another company with excellent earnings estimates, look to Equinix (EQIX). This name is just on the line between mid-cap and large-cap, with a market capitalization of $10.6 billion. The company, which sells managed hosting services for corporate and government clients, is due to report fourth-quarter and full-year results Feb. 13 after the close.

Wall Street is eyeing per-share income of $0.71 per share in the quarter, and a 51% income rise to $2.60 per share for all of 2012. This year, Equinix is expected to earn $3.27 per share, up another 26%.

Be aware, however, that Equinix stock has a high beta of 1.44. Even investors with a longer-time horizon could get spooked by sudden price swings to the downside. Here, again, is a name that's well extended from key price lines, so investors may want to wait for a pullback with support before making a purchase.

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