These Are Probably Safe Havens

 | Oct 03, 2011 | 10:30 AM EDT  | Comments
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Stock quotes in this article:

nem

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cmi

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aapl

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gmcr

Although that ugly third quarter is now over from a stock perspective, we are now enter earnings season, which means more danger is upon us from a fundamental perspective. Companies will soon be surprising us with how bad the quarter really was -- or will report good numbers, but surprise us with how bad the outlook is. Clearly the market action is trying to tell us fundamentals are deteriorating although, as I have written, the anecdotal evidence is not supporting the notion of full-blown collapse. Struggle, yes; collapse, no. But, as I have also written, that stance is low in confidence, in the sense that it can change instantly as the data changes.

 To help avoid destruction in the coming earnings minefield, I fired up Factset and looked for names for which estimates were revised upward during the quarter. I figure that the economic backdrop is well-known, so if analysts are sensing stronger business conditions for a company despite the backdrop, there is a good chance the name is a safe haven.

 It's no surprise that most of the earnings action has been downward. Of the 3,295 publicly traded names in the U.S. with market capitalization above $1 billion, only 36% had a consensus third-quarter earnings estimate that was higher at the end of the quarter than it was at the start. (That percentage is actually better than I thought it would be! But I'll present a caveat on that shortly.)

 From within that large group, I sorted out that names for which the estimate is now 10% higher than it was at the start of the quarter, and also screened only for large-cap names with market cap of $5 billion or greater. The latter filter is mainly for simplicity, to whittle a list of 200 names down to a manageable 30 that are easy to buy.

The table below shows the large-cap names with the best change in earnings estimate over the course of the quarter. These are probably a good bet to hold up well and report solid earnings, although the forward guidance is still a risk factor. Assessing that risk is a job for your thorough analysis, not a simple quant screen!

Best Q3 EPS Upward Revisions
Source: Factset and Thomson First Call

I own several names in this list, such as Newmont Mining (NEM), Cummins (CMI), and Apple (AAPL). My portfolio uses estimate trends as a starting point, but I overlay a number of other restrictions, especially valuation related. (That is why I don't own Green Mountain Coffee Roasters (GMCR). It shows great earnings trends, but it's far too expensive for my GARP style.)

One final caveat: The change in estimate is a simple point to point over the course of the quarter. Companies on this list could, in fact, have estimates that rose early in the quarter, but which then fell more recently -- and that would be a huge red flag. I will revisit that subject Wednesday, and we will refine our look at the "safest" names to play in this upcoming earnings season.

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