As the earnings season kicks off this week, starting with the big banks, it’s important to manage our expectations. The stock market, which is already quite pricey, is unlikely to experience a significant surge even with robust reports. However, there are still opportunities for certain stocks to ride a potential wave of good numbers.
The Current State of the Broader Market
The Russell 1000 index has seen an impressive increase of over 20% since its low in October. This substantial rise has resulted in the index’s forward price/earnings multiple reaching approximately 19 times, compared to the previous 15 times. It’s worth noting that such a high valuation is quite notable considering the prevailing high interest rates.
At the moment, stock prices have already accounted for solid profit growth for at least the next year. Therefore, moderate earnings beats will have little impact on lifting the broader market. Only significant earnings beats have the potential to make a noticeable impact.
Identifying Potential Opportunities
However, this doesn’t imply that there aren’t any promising stocks with decent gains even if their earnings numbers don’t impress.
In pursuit of such stocks, Evercore strategists conducted a thorough screening of the Russell 1000 index. They focused on companies with market values of at least $10 billion that ranked in the bottom 50th percentile of performance since the end of March. This timeline corresponds to when concerns about bank failures and the stability of the financial system began to ease.
Additionally, the selected companies needed to have surpassed expectations for both earnings per share and sales in at least seven out of the past eight quarters. Furthermore, they had to have avoided any double misses or misses on both top and bottom lines. Finally, these companies had to have achieved a double beat in the first quarter of this year and experienced an increase in their share prices immediately following their releases.
Promising Stocks to Consider
Based on these criteria, the following stocks made the cut:
- Kraft-Heinz (ticker: KHC)
- Utility Southern Company (SO)
- Procter & Gamble (PG)
- Hershey (HSY)
- Citigroup (C)
- eBay (EBAY)
- Lululemon Athletica (LULU)
Now, let’s take a closer look at the last three stocks on this list.
Citigroup: Potential for Growth Amidst Low Expectations
Citigroup (Citi) has remained relatively stagnant since the end of March, in contrast to the Russell 1000’s almost 7% gain. Despite beating expectations in the first quarter, Citi’s earnings per share (EPS) expectations for the next year have declined due to concerns about reduced loan volumes and a decline in M&A deals.
As a result, Citi’s shares have become attractively priced, with a price/earnings multiple of just under 7.5 times, less than half of the Russell’s multiple. With low expectations and the potential for business stabilization in the near future, Citi simply needs to surpass expectations to see its stock rise. The first-quarter beat pushed the stock price up by almost 5%. Citi will be reporting its second-quarter numbers on Friday.
eBay: An Opportunity for Upside Movement
Similarly, eBay has remained relatively flat, with analysts’ EPS estimates for the year experiencing minimal change since March. Currently, eBay’s stock is trading at a significant discount compared to the Russell 1000’s multiple, at 10 times earnings. Historically, eBay has occasionally traded only a few points below the index.
If eBay’s upcoming earnings report on July 26 indicates increased consumer spending, there is potential for the stock to rise. After the last earnings report, the stock experienced a modest increase of just over 5%.
Lululemon Athletica: Growth Potential at a Premium
Lululemon Athletica (Lulu) stock has seen a slight increase of just over 1%, with EPS estimates remaining relatively unchanged. However, it has declined from its record high in November 2021 and currently trades at 29 times earnings, approximately 50% higher than the Russell 1000’s multiple but down from three times higher at the end of 2021.
Lulu has always commanded a premium compared to the market due to its high growth driven by its e-commerce business and trendiness. Even if the company’s upcoming earnings report on September 1 only meets expectations, Lulu’s stock is expected to receive a boost. The last report resulted in an 11% increase in shares.
It is important to note that earnings season will commence on Friday. There is still time to consider investing in these stocks, but opportunities may be limited.
