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Don’t Expect a Market Surge This Earnings Season

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As the earnings season kicks off this week, starting with the big banks, it’s important to set realistic expectations. Despite the potential for robust reports, it’s highly unlikely that these earnings will significantly impact the stock market. In fact, current market conditions have already priced in much of the expected growth.

The Russell 1000 index has seen a substantial increase of over 20% since its October low. This surge has resulted in a forward price/earnings multiple of roughly 19 times, a high valuation considering the current interest rate environment. With stock prices already reflecting solid profit growth for at least the next year, it’s clear that modest earnings beats will have minimal impact on the broader market. Only truly exceptional beats can make a substantial difference.

Identifying Stocks with Potential

However, this doesn’t mean there aren’t opportunities to be found. There are still cheaper stocks that have the potential for nice gains, even if their earnings results don’t “wow” investors. Evercore strategists have done their research and identified a group of companies worth considering.

To be included in this group, companies had to meet specific criteria. Firstly, they needed to have a market value of at least $10 billion and rank in the bottom 50th percentile of performance within the Russell 1000 since the end of March. This timeframe coincides with when concerns about bank failures and the stability of the financial system began to ease.

Furthermore, these companies had to demonstrate consistent beats in both earnings per share and sales for at least seven out of the past eight quarters, without any double misses or misses on both top and bottom lines. Additionally, they needed to have a double beat in the first quarter of this year, as well as an increase in their share price during the trading day following their earnings releases.

Promising Stocks to Watch

After the rigorous screening process, the following companies made the cut:

  1. Kraft-Heinz (ticker: KHC)
  2. Southern Company (SO)
  3. Procter & Gamble (PG)
  4. Hershey (HSY)
  5. Citigroup (C)
  6. eBay (EBAY)
  7. Lululemon Athletica (LULU)

Now, let’s take a closer look at the last three stocks on this list and explore their potential for growth and investment opportunities.

Citigroup’s Potential for Growth

Citigroup (Citi) has been relatively stagnant since the end of March, contrasting the Russell 1000’s substantial 7% gain. Despite beating expectations in the first quarter, Citi’s projected earnings per share for the next year have dipped due to concerns surrounding reduced loan volumes and a decline in M&A deals. As a result, Citi’s shares are currently undervalued, with a price/earnings multiple of just under 7.5 times, less than half of the Russell’s multiple. By surpassing estimates and demonstrating signs of stabilization, Citi has the potential for stock price appreciation. The price increased by nearly 5% after the first-quarter beat, and Citi is set to report its second-quarter numbers soon.

eBay: A Hidden Opportunity

eBay has also experienced a period of stagnation with minimal changes in analysts’ EPS estimates for the year since March. However, the stock is currently trading at a significant discount compared to the Russell 1000’s multiple, with a price/earnings ratio of 10 times earnings. In the past few years, eBay has traded closely with the index but is now notably below it. The upcoming earnings report on July 26 holds potential for significant movement in the stock if it reveals increased consumer spending. After the last earnings report, eBay’s stock rose just over 5%, indicating its sensitivity to positive earnings.

Lululemon Athletica: Maintaining Its Momentum

Lululemon Athletica (Lulu) has observed a modest increase in stock price by just over 1%, while EPS estimates have remained relatively stable. Nevertheless, the stock has retreated from its record high in November 2021 and currently trades at 29 times earnings. Although this is approximately 50% higher than the Russell 1000’s multiple, it is significantly lower than triple its value at the end of 2021. Lulu consistently maintains a premium compared to the broader market due to its strong growth driven by its e-commerce business and trendiness. Even if the upcoming earnings report on September 1 only demonstrates solid performance, Lulu’s stock should receive a boost. The previous report resulted in an approximately 11% increase in share value.

Conclusion

As earnings season commences, there is still an opportunity to consider investing in these stocks. However, given the limited time available, it is crucial to act promptly.

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