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The positive surprise pattern is traced in fundamental data. Companies with rising sales growth, higher gross profit margins, lower fixed costs to sales, lower financing cost, and rising profitability are more likely to announce a positive surprise. The Earnings Surprise Model is created to exploit that pattern.
I have chosen companies that will report their earnings on July, 22 that have a positive surprise pattern in the 2Q2010 fundamentals. I have pared down that list to focus on companies with depressed share prices. These should give us the biggest bang for the buck when the company delivers the surprise on July, 22. Review the positive surprise pattern in the fundamentals of Advanced Energy Industries, Inc. (AEIS), Air Products & Chemicals Inc. (APD), Amazon.com Inc. (AMZN), Avid Technology Inc. (AVID), Cabot Microelectronics Corp. (CCMP), Digi International Inc. (DGII), Electronics for Imaging, Inc. (EFII), Gentex Corp. (GNTX), Invacare Corporation (IVC), Microsoft Corporation (MSFT), Nucor Corporation (NUE), Rambus Inc. (RMBS), Reliance Steel & Aluminum Co. (RS), and United Parcel Service, Inc. (UPS) These stocks are all eligible for the Earnings surprise model.
Three companies that are owned by the Earnings Surprise model will report on July 21. During 2Q2010, BlackRock, Inc. (BLK) recorded an improvement is sales growth and profit margin, SG&A expenses to sales are high and falling. That is producing a leveraged acceleration in operating cash flow that the company further enhanced last quarter with an increase in debt and cash from a recent share offering apparently anticipating the cash needs of an acquisition.
Freeport-McMoRan Copper & Gold Inc. (FCX) has a very strong top line and lower costs during 2Q2010. SDG&A expenses to sales are low in the company record but still falling and interest costs are down. That is a leveraged acceleration that produces a strong increase in profitability at the company and better chance of a positive earnings surprise.
Finally I am anticipating a positive surprise today from Western Digital Corp. (WDC) where during 2Q2010 a very strong top line and lower costs produced leveraged bottom line acceleration.
These three names were selected for the earnings surprise model portfolio because, as well as a positive surprise pattern, they are highly profitable companies where the stocks have been under pressure in recent weeks and the shares are depressed.
