The third quarter is likely to be the first since the recession ended in 2009 that the S&P 500 turns in negative earnings growth. Given the substantial rally of the past three months, the market appears to be willing to overlook this negative earnings trend for now; however, the extended nature of the rally makes any company that misses earnings vulnerable to a significant and instant selloff. It is prudent to avoid that sort of earnings-related pullback as best one can. I am allocating the limited amount of new long positions in my portfolio to stocks whose earnings seem to be going in the opposite direction of the overall market. Here are two cheap stocks with earnings estimates that have moved up over the last few months and have posted impressive revenue growth, even in this anemic economy.
CAI International (CAP) is a global intermodal marine-cargo container leasing business.
Four reasons CAP is a solid growth play at $21 a share:
- Consensus earnings estimates have ticked up some 5% for 2012 and 2013 over the previous two months.
- The company has easily beaten earnings estimates three of the last four quarters and is priced below 6x forward earnings, a discount to its five-year average (8.6).
- Revenue is tracking to post more than 35% growth in 2012 and analysts have pegged it just below 20% sales growth in 2013. The stock has a five-year projected price/earnings/growth ratio of less than 1 (.68).
- The company has roughly tripled operating cash flow since 2009. It is also selling near the bottom of its historical range based on price/earnings, price/book and price/cash flow ratios.
Lithia Motors (LAD) is a retailer of new and used vehicles in the U.S. The company offers 28 brands of new vehicles and various brands of used vehicles in 86 locations in 11 states.
Four reasons LAD still has upside from $32 a share:
- The company has crushed earnings estimates each of the last six quarters. The average beat over consensus during that period has been north of 40%.
- Consensus earnings estimates have moved up some 8% for 2012 and 2013 over the last two months.
- The company should post better than a 20% sales increase in 2012, and analysts expect at least 8% revenue growth in 2013. LAD sports a five-year projected PEG of less than 1 (0.81).
- The stock sells for less than 11x forward earnings, a discount to its five-year average (15.1).
