I know I may sound like a broken record, but earnings season really is my favorite time of year. The reality is it helps separate the wheat from the chaff. Every company must open its books and show Wall Street how it fared during the most-recent quarter.
This first-quarter earnings season has been particularly stunning. According to FactSet, more than 60% of S&P 500 companies have released results from the latest quarter, and 86% of these companies have exceeded analysts’ earnings estimates. What’s even more impressive is that the first-quarter earnings growth rate is now running at 45.8%, up from the estimated growth rate of 23.8% at the end of March. That’s the best earnings growth rate in 11 years!
As you know, I’m a numbers guy, so I take these earnings reports very, very seriously. The reports give me the opportunity to see which companies are truly fundamentally superior, i.e., continue to boast strong sales and earnings growth and offer positive future guidance. These are the companies that I recommend across all my services, not the stocks Wall Street is hyping up that are really just the flavor of the week.
Now, on the flip side, should a company show signs of slowing earnings momentum or dwindling buying pressure, then I know it’s time to sell, even if the stock is showing big returns.
Case in point: AudioCodes Ltd. (AUDC).
I added AUDC to my Platinum Growth Club Model Portfolio back in January 2019. At the time of my original recommendation, AudioCodes was experiencing strong demand for its products, as evidenced by strong top- and bottom-line growth. Over the past few years, the company continued to post strong quarterly results and exceed analysts’ expectations, especially as the work-from-home trend heated up in the past year.
Take the most-recent quarterly report, as an example. On April 27, AudioCodes reported first-quarter earnings of $12.7 million, or $0.37 per share, on revenue of $58.8 million. That represents 62.8% year-over-year earnings growth and 13.1% year-over-year revenue growth. Analysts were expecting earnings of $0.33 per share and revenue of $57.98 million, so AudioCodes posted a 12.1% earnings surprise and a slight revenue surprise.
While AudioCodes still expects demand to remain robust in the years to come, there has been a significant drop off in institutional buying pressure recently. As you can see in AUDC’s Report Card below, it earns a lowly F-rating for its Quantitative Grade.
This drove the overall stock to a D-rating, which makes it an automatic sell. So, I recommended that my Platinum Growth Club subscribers sell the stock on Monday and lock in their nearly 200% gains in about two years.
The Quantitative Grade is something I follow very closely. It is based on a stock’s Alpha (return uncorrelated to the overall market) divided by its standard deviation (volatility). Many high relative strength, high Beta (return correlated to the overall stock market) stocks often beat the overall market. They also have lower Alphas, as their return uncorrelated to the overall market has diminished. When the stocks become more correlated to the overall stock market, their quantitative grades tend to fall.
The whole point of the quantitative analysis in Portfolio Grader is to identify high Alpha stocks that are moving independent of the overall stock market with lower volatility. Typically, high Alpha, low standard deviation stocks are benefitting from persistent buying pressure. Because AUDC’s buying pressure had become more erratic recently, its Quantitative rating fell. So, it was time to sell and move on to more high-quality stocks.
The reality is I only want to be invested in the crème de la crème, so I have no problem cutting the cord on a stock whose fundamentals are no longer up to snuff. And that was exactly the case with AUDC.
I am pleased to say that my Platinum Growth Club Model Portfolio is filled with the crème de la crème. I handpick all of my Model Portfolio recommendations from my different services – Growth Investor, Breakthrough Stocks and Accelerated Profits – so you can rest assured that you’re always invested in the best of the best.
Across all of my services I have more than 100 stocks (plus 31 LEAPS call options, or Long-term Equity Anticipation Securities, in my Power Options trading service), and each and every one boasts strong earnings and sales growth.
Of course, you don’t have to invest in all 100+ stocks. That’s what the Model Portfolio is for, which currently houses 54 fundamentally superior stocks. So, if you want to stock up on fundamentally superior stocks, I encourage you to give Platinum Growth Club a try.
As a Platinum Growth Club subscriber, you’ll have full access to all of my services, including every Weekly Update, Monthly Issue and Flash Alert, as well as exclusive Platinum Growth Club Live Chat Events (my next one is scheduled for May 17) and more!
And you really couldn’t be joining at a better time, as I am releasing two brand-new buys in the Breakthrough Stocks May Monthly Issue today. Both stocks are characterized by accelerating earnings momentum, positive analyst revisions and persistent institutional buying pressure, which makes them great additions to Breakthrough Stocks this month.
Note: The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owns the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below:
AudioCodes Ltd. (AUDC)