These Stocks Laugh at Wall Street

In these heady economic times, Mr. Market seems to enjoy dogpiling on any company that dares to fall short of analysts' estimates. To defy that trend, we're here to celebrate stocks that didn't merely meet Wall Street's predictions, but laughed in analysts' faces by leaving their miserly forecasts in the dust. The companies below soundly trounced earnings estimates by 20% or more in the latest quarter.

Sometimes a company will be expected to lose money, but then upend the analysts' apple cart by reporting profits. You sometimes can't actually calculate by how much it beat the estimates (seventh-grade math tells us we can't divide by zero or less and get a meaningful result!), but it's still useful to understand why companies were able to exceed expectations.

Company

CAPS Rating (out of 5)

Latest Quarter EPS Estimate

Latest Quarter EPS Actual

Estimated Long-Term Growth

American Capital (Nasdaq: ACAS  )

****

$0.08

$0.17

3%

Dynegy (NYSE: DYN  )

****

($0.50)

$0.10

4%

STEC (Nasdaq: STEC  )

*****

($0.13)

($0.08)

16%

Source: Yahoo! Finance.

Beating estimates recently isn't necessarily enough to make a stock a winner. Analysts are notoriously lousy at forecasting results, and one-time items can sometimes push earnings over the top. Wall Street professionals typically don't include such extraordinary events in their forecasts.

Rather than focusing only on the past, we'll check whether analysts have a bead on future performance. With help from Motley Fool CAPS, we'll see which of the companies listed above will have the last laugh.

Laugh, clown, laugh!
When you invest alongside the managers at business development companies American Capital, Apollo Investment (Nasdaq: AINV  ) , or Ares Capital (Nasdaq: ARCC  ) , you're betting on their ability to find good companies to take a stake in and ultimately sell later on at a profit. That hasn't been the case at American Capital lately. Its investment portfolio ended the latest quarter with a fair value of $5.7 billion, but at a cost of $9 billion. Hello? Can you say value destruction?

Of course, we know that American Capital went through a really rough time during the recession, and defaulted on its revolving line of credit, bonds, and privately placed notes last year. It subsequently restructured its debt (at a cost), and those portfolio businesses it holds still have value. An economic recovery would boost the probability that American Capital will wind up with a profit.

CAPS member tahoeskibum says the business development company will get hammered anyway if the economy double-dips, so the reward lies in looking for things to improve.

I still think this stock is a crap shoot but, since I own it, I hope it will recover once the financial mess is behind us. If it goes, it should go big, otherwise it is probably toast.

Light at the end of the tunnel
The recession hurt energy provider Dynegy as business and industrial customers cut back on demand. That really didn't change much in the company's latest quarter: It surprised analysts with a big profit, especially because revenues continued their slide, falling 5% on slack demand. What helped the utility's performance was its energy hedges, which contributed $253 million, up significantly from $169 million from a year ago. Until the economy grows and industrial demand rises, Dynegy's stock may remain in a tailspin, leading some analysts to conclude the company may actually be floudering.

The CAPS community's not buying that, though, continuing to put a four-star rating on the company. Low natural gas prices have hurt Dynegy's operations, and its coal-fired plants face a more broad-based attack from environmentalists. Still, these are factors that play in the outlook for other utilities as well, from Duke Energy (NYSE: DUK  ) to Pacific Gas & Electric.

CAPS member LWILLS expects Dynegy will turn around soon enough, while aswong says it's undervalued all the way around.

Fixed Assets way undervalued. LS Power Partners selling depressed prices. Stock should appreciate when economy turns around and natural gas prices go up. No major debt maturing until 2015.

Dim the lights
Solid-state drives are on track to replace hard drives as the primary storage device for all computers, and analysts are looking for enterprise-level sales to double by 2015. STEC is the leading name here, but it faces competitive pressure from Seagate Technology  (NYSE: STX  ) , which sells its own solid-state drives.

STEC has recovered from inventory issues caused last year when EMC overstocked the Zeus drive. With more than 92% of the CAPS members rating the drive maker picking it to outperform the broad market averages, it appears they're looking for some memorable long-term returns.

Head over to the STEC CAPS page and offer your view on what the future holds.

Yukking it up
The market's rally has evolved from being mostly fueled by low-quality stocks to dragging most others along, based on lower year-over-year comparables. If you think there's some funny business afoot, let us know: Head over to Motley Fool CAPS and sound off.

Duke Energy is a Motley Fool Income Investor pick. Try any of our Foolish newsletter services today, free for 30 days.

Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings. The Motley Fool has a disclosure policy.


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