Michael Brush: Here’s a roadmap for stocks to own and avoid this earnings season

by | Oct 2, 2023 | Stock Market

With corporate earnings season just around the corner, Todd Gervasini, a portfolio manager at Wakefield Asset Management, is giving a lot of thought to potential stock-market winners and losers.  Information technology and energy stocks should beat estimates and outperform, he says — especially Meta Platforms
Applied Materials
Cadence Design Systems
and Marathon Petroleum

But be careful with consumer staples, industrials and communications services stocks like telecom and cable company names, he adds.   Why should you listen to Gervasini? For starters, the firm he founded has a great investment track record. Since inception in April 1997 through June 2023, the Wakefield Large-Cap Equity Portfolio gained 11.6% annualized vs. 8.8% for the S&P 500
Gervasini also is an expert in earnings and earnings-surprise trends. Here’s a look at five lessons we can learn about investing from how Gervasini gets his edge, and stocks that look attractive to him now.  1. Exploit the psychology of sell-side analyst crowd behavior to find big, unexpected earnings growth: Job security is fundamental. On Wall Street, this translates into a basic rule of thumb for sell-side analysts: It’s better to be wrong with the pack than on your own as an outlier. After all, if you’re wrong with the group, you can always say “Well, everyone else got it wrong, so don’t fire me!”  This dynamic leads to a way to predict “unexpected” earnings growth not priced into a stock. For instance, if an analyst expects a company’s earnings will grow to $2 per share next year from $1, but the average forecast is $1.50, he’s more likely to publicly increase his estimate to $1.50 or $1.60. This conservative stance tells you more upward estimates are on the way. Then, as the company’s growth story is confirmed, the analyst will move earnings estimates higher. In short, you want to own companies getting decent upward estimate revisions, because it’s likely that more are coming. Developed in the early 1990s, this stock-selection system is called “earnings estimate revisions analysis.” In the vernacular, Wall Streeters call it the “cockroach theory” because when you have seen one upward estimate revision, there are probably more where that came from.  Revisions analysis is at the core of Gervasini’s investing approach. “We are trying to take advantage of sell-side behavior,” he says. “It is predictable behavior and you can get into stocks before future revisions happen.”  A good example, Gervasini says, is Meta Platforms, a stock he purchased in February 2023. Even though the shares are up 138% so far this year, Gervasini still likes Meta because it continues to rank well in his estimate revisions model. A more recent pur …

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