Protect Your Portfolio From the Great Earnings Disappearing Act

Now you see it, now you don’t. Second-quarter profits are disappearing before our eyes.

Or rather, that’s at least what analysts are predicting. The analyst community now expects second-quarter S&P 500 earnings to advance just 0.7% over last year. Keep in mind that at the beginning of April analysts called for 4.2% second-quarter earnings growth. So this represents a staggering 83% reduction in the consensus estimate in the past three months! Over the same period, analysts have also cut their S&P 500 sales growth estimates by 62%.

Why does this matter? Well, analysts are paid to estimate a company’s earnings outlook. Make a wrong estimate that costs investors money and as an analyst, you could lose your job. It’s this do or die environment that makes analyst revisions an important indicator of future success. If a number of Wall Street analysts start to move their forecasts higher, it’s a good bet that the stock will outperform expectations and deliver market-beating returns for investors.

And just as upward revisions are an important indicator of a company’s future success, downward revisions are a bad sign. If the analyst community is correct, second-quarter profits will grow at the third slowest pace seen in four years. Some of the S&P 500’s biggest losers include the poorly-rated stocks I covered yesterday:

  • E*TRADE Financial Corp. (ETFC): Over the past ninety days, the consensus estimate has dropped 14% to $0.02 per share. This represents a 14% decline in quarterly profits.
  • SUPERVALU Inc. (SVU): In the past three months, the consensus estimate has plunged 67% to $0.03 per share. SUPERVALU is expected to report a 84% drop in earnings.
  • Yum! Brands Inc. (YUM): In the past ninety days, analysts have revised their earnings estimates down 7% to $0.54 per share. Yum is now headed towards a 19% pullback in profits.

On the other hand, in this uncertain earnings environment, those stocks that can pull off earnings beats will win big. The following companies have a strong track record of topping estimates and could very well pull off earnings surprises this time around:

  • Citigroup Inc. (C): The consensus earnings estimate has been revised up 4% over the past three months to $1.17 per share. Analysts now forecast 17% bottom-line growth.
  • SanDisk Corp. (SNDK): In the past ninety days analysts have revised their earnings estimates up 11% to $0.92 per share. SanDisk is now headed towards 338% earnings growth.
  • Yahoo! Inc. (YHOO): Over the past three months the consensus estimate has jumped 11% to $0.30 per share.

If you own any of the six stocks I listed above, you may want to take note of when they release quarterly results and plan accordingly. As I mentioned yesterday, I expect second-quarter earnings to take center stage over the next month or so, and this could encourage some big moves in the market. In the meantime, I’ll continue to cover the biggest earnings announcements in this blog and my Stock of the Day feature.


Louis Navellier

Louis Navellier

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