Author: Bob Gay, GEARS
Disclaimer: Bob Gay owns OXY in his Covestor Luxury Liner and Speedboat models.
October 13, 2010: At GEARS we have developed unique tools to find improving fundamentals companies when their share price is depressed and identify deteriorating fundamentals companies when their share price is extended. To perform that analysis, we have created an accurate set of fundamental performance metrics and a share price volatility calculator.
A review of our fundamental metrics derived from last quarter’s financial statements is useful just before the quarterly earnings announcement. Analysis of the company fundamentals from the prior period provides context in interpreting the new report.
We have selected the companies that have indicated that they will make their earnings announcement in the next few days and created four categories.
1) Improving Fundamentals and Depressed Share Price- Companies with improvement evident in their fundamental metrics from last quarter where shares are currently depressed. Trends in company fundamentals tend to persist. If the stock is trading nearer the bottom of the historical volatility range relative to the market, the shares are depressed. This combination of evident improvement and depressed share price produces the eligible population for the Earnings Surprise Model.
After the strong stock market rally in recent weeks the number of shares trading at a discount to their historical volatility range has declined. Stocks with depressed share priced of companies with improving fundamentals metrics from the most recent set of financial statements are Cyberoptics Corp,(CYBE), Lincare Holdings Inc,(LNCR), AMR Corp,(AMR), Steel Dynamics Inc,(STLD), Heartland Express Inc,(HTLD), Astec Industries Inc,(ASTE), Occidental Petroleum Corp,(OXY), Yahoo! Inc,(YHOO), Cree Inc,(CREE), Fulton Financial Corp,(FULT) and Raymond James Financial Cor,(RJF).
2) Improving fundamentals- Companies with improvement evident in their fundamental metrics from last quarter with share prices that are not trading at a discount to their historical volatility range. After the strong rally in stocks in recent weeks it may not be surprising that this category contains the largest list. Over time companies with improving fundamentals perform well and will often lead a market advance. Companies with fundamentals improvement are good to own. The list of companies expected to announce earnings in coming days where share prices are not depressed is collected in this book of improving fundamentals reports.
3) Deteriorating Fundamentals Extended Share Price- Companies with deterioration evident in their fundamental performance metrics from last quarter that are trading at a premium to the historical volatility range. In the population of companies due to report in the next week there are Omnicom Group Inc,(OMC), Forest Laboratories Inc,(FRX), Pactiv Corp,(PTV), Marten Transport Ltd,(MRTN), American Ecology Corp,(ECOL), Aware Inc,(AWRE), Badger Meter Inc,(BMI), Park National Corp,(PRK) and Goldman Sachs Group Inc,(GS).
4) Deteriorating Fundamentals- Companies with deterioration evident in their fundamental performance metrics from the most recent quarter that are not trading at a premium to the volatility range. This is the category to be watched most closely for improvement in their fundamental performance metrics as the financial statements from the new quarter are collected. Companies in this category that are expected to announce earnings in the coming days are Boston Scientific Corp,(BSX), Sonic Corp,(SONC), Cache Inc,(CACH), Scholastic Corp,(SCHL), Consolidated Tomoka Land Co,(CTO), Packaging Corp Of America,(PKG), Hub Group Inc,(HUBG), Lockheed Martin Corp,(LMT), Labranche Co,(LAB),
Differentiating between improving and deteriorating companies is critical to successful active portfolio management. Making purchases of evidently improving companies when share prices are depressed is the basis of all GEARS models.
