With Federal Reserve Chairman Ben Bernanke testifying on the Hill for two straight days, Treasury Secretary Timothy Geithner grabbing headlines with his "Europe is burning" comments and fresh economic data, investors have had a lot distracting them from what’s really important—earnings!
Now there is a lot going on with politics, policy and the economy. I closely followed Bernanke’s testimony in front of the Senate Banking Committee and the House Committee on Financial Services.
And while I don’t mind watching the fireworks between Representative Dr. Ron Paul and the Fed Chairman, that’s not where the real opportunities for investors are right now.
The opportunity is in strong growth companies that are reporting sales and earnings growth and are beating analyst expectations.
Case in point is W.W. Grainger Inc. (GWW). This is one of my current Blue Chip Growth recommendations and shares gapped up 11% yesterday after the construction equipment maker announced strong second-quarter operating results and increased its outlook for the rest of the year. Over the past several months, Grainger has aggressively expanded into emerging markets, including the buyout of Brazil’s AnFreixo.
Thanks to this and a number of other factors, Grainger’s profits advanced 12% to $190.7 million, or $2.63 per share, compared with the same quarter last year. Analysts forecast earnings of $2.62 per share so Grainger posted a modest earnings surprise. Sales also jumped 12% year-over-year to $2.25 billion; this just missed the $2.27 billion consensus estimate.
What really got investors excited was that Grainger raised the lower end of its 2012 earnings guidance to between $10.50 and $10.80 per share.
In all, three of my recommended companies have reported earnings so far and all have beat analyst expectations. And I have five more Blue Chip Growth companies that are reporting earnings today. Can you see why I’m so excited?
Especially when you put this up against value stocks or speculative plays that are supposed to be in turnaround mode.
First, Citigroup (C) reported mixed second-quarter earnings announcement and then Bank of America Corp. (BAC) did the same.
On the one hand, BAC finally swung to a profit, topping the consensus earnings estimate by over 35%. Sales also advanced 65% to $21.97 billion. However, there was a dark cloud that overshadowed much of this good news, and that is the fact that Bank of America has a whopping $22.7 billion in mortgage claims. This represents nearly a four-fold surge in the past four months, and the firm has only added $395 million in reserves to cover any claim payments.
This is a prime example of the types of pitfalls that await the unwary investor, and it looks like Bank of America is going to have these claims and any settlement proceedings hanging over its head for some time.
The second shocking announcement came from Capital One Financial Corp. (COF), which has been ordered to pay $210 million in refunds and regulatory fines due to questionable marketing tactics. Representatives at Capital One Bank allegedly tricked over 2.5 million credit card holders into purchasing unnecessary and expensive services including payment protection and credit monitoring. A consumer protection watchdog discovered this activity and ordered Capital One to return $150 million to customers and $60 million to various regulatory agencies. Capital One’s profits are already expected to sag over 3% this year, and this charge will undoubtedly hit the company’s bottom line even more.
In the case of banks, there is usually a gray cloud behind every silver lining, and I recommend that you stay far away from this sector and in industries and businesses that are growing sales and earnings and scandal free.
If you’re one of my Blue Chip Growth members, you should go directly to our Earnings Center for the latest details on earnings expectations and a full calendar of reporting dates.
If you’re not a member, my free stock-rating tool, Portfolio Grader, is at your disposal. In either case, be sure to keep your eye on your inbox for more market, stock and earnings news through these Market 360 communications.