A Different Take on Earnings Season

 | Oct 11, 2012 | 2:30 PM EDT
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As we head deeper into earnings season, I am once again amused at all the noise and fury that is concentrated on the reports, which are quarterly snapshots of a corporation -- and nothing else. Far from being the Holy Grail that Wall Street's short-term focus has turned it into, a company's quarterly earnings report and 10Q filing is just a tiny slice of a corporate lifespan. The report does contain valuable information about the current business and financial status of a company, but it is just an update. It was never intended to be the stock market equivalent of the Daily Racing Form.

As I surf the Internet and listen to the various stock commentators, it seems that everyone is focusing on, and biting on, these short-term reports. Hundreds of billions of market cap will be created and destroyed by how actual earnings compare to the always highly accurate analysts' estimates. Incredibly, most of this money will be bet on the same stocks that always dominate the news. Investors and traders playing the earnings game are competing against the super-computer armed market makers, themselves and the big Wall street firms to pick up pennies betting on the favorite.

I approach earnings season a little differently. While I occasionally engage in speculation, betting on the unknowable against a player with a formidable edge does not interest me much. I like to look at cheaper companies that have run off a string of earnings disappointments. Except for the shrinking handful of analysts forced to cover them, no one cares about these companies or expects anything g good to happen to them. Therefore, often excessively negative expectations are built into their share prices.

Pico Holdings (PICO) is an interesting collection of real estate, agricultural and water assets. The company also has an insurance business in run-off mode and investments in fixed income and equity securities. Pico has the misfortune of being an asset-rich company in an earnings driven market. The shares trade right at book value; however, the company has a lot of land and water rights that have been on the book for an extended period of time and may be understated in value. Pico has had two consecutive enormous earnings shortfalls, so there is only one analyst following the company right now.

This stock is a win- win in my eyes. If the company has another bad earnings quarter, the shares could drop further and allow me to buy them at a cheaper price than the current quote. If conditions have improved, no one is going to notice and I can pay around the current quote for a solid collection of assets with an improving earnings stream. The company is scheduled to report early in November

Tutor Perini (TPC) is another stock I will be following this earnings season. This contractor and construction management company is dependent on infrastructure spending and has posted three consecutive large earnings short falls. Wall Street estimates of the company have fallen by about 25% over the past three months. In spite of the weak environment for large scale construction contracts, Perini is managing to stay busy with projects that include the Tappan Zee Bridge rehab in New York, the Alaskan Viaduct in Seattle and the Freedom Tower in New York City. The company has an existing backlog of more than $5 billion and pending awards of more than $4 billion. It may not live up to Wall Street's expectations but this company is on track to make $1.50 or so a share for the full year.

Tutor Perini is a 115-year old company that has been publicly traded for more than 50 years. When the economy firms up, this company will win more than its share of new infrastructures construction -- as well as large commercial and industrial projects. I hope it falls short again so I can pay single digits for a stock that traded in the $70s less than five years ago.

I have never found it productive or profitable to watch the same stocks as everyone else or trade like the crowd. I will be watching the unloved and unpopular names in the hope that this earnings season will create attractive long-term entry points.



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