Gauging Earnings Prospects

 | Apr 12, 2013 | 7:00 AM EDT  | Comments
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Stock quotes in this article:

cree

,

dhi

Last week, I posted my "distant early warning" for names that are at risk of missing earnings. The indicator is extreme estimate cuts by analysts, which indicate that they are getting wind that business conditions are deteriorating. While this is not a perfect indicator -- nothing ever is -- you need to work hard to justify why you are long a name in which numbers are being cut.

On the positive side, companies whose estimates steadily rise during the quarter have a better likelihood of beating estimates and raising guidance, and that is usually good for the stock. The table below shows names that have had the best increases in first-quarter earnings-per-share estimates during the quarter. These are names that could have the best reaction to positive earnings reports over the next few weeks.

Interestingly, there are basically no industrial names (as classified by Factset as Producer Manufacturing). Tech hardware is not looking too bad. I especially like the LED name Cree (CREE), which is levered to the increasing penetration of LED lights into homes and businesses. Conversely, software, which is in Technology Services, has little to offer.

Housing stocks, which would be in Consumer Durables, are notably absent, with only DR Horton (DHI) making an appearance, and even its upward revision strength is mediocre. A number of energy names are still looking good, even though the stocks have been selling off. There are a fair number of finance names, but keep in mind that that is a very large sector with dozens and dozens of names.

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