Assumptions are the key. Wall Street assumes it knows a company. It produces a profit target. It expects the company to simply meet the mark. That's why it can get awfully interesting, awfully quickly, when a company laps the analysts. It's a good sign that Wall Street has underestimated the company and its potential. Let's take a closer look at a few of the companies that humbled the prognosticators this past week.
We'll start with Ruby Tuesday (NYSE: RI ) . Thanks to higher menu prices and an aggressive advertising campaign pitching its new premium burger offerings, the casual dining chain saw earnings per share this past quarter grow from $0.42 to $0.50 year over year. Analysts met the resurgence only halfway, pegging earnings to come in at $0.46 a stub.
The healthy quarter may be a surprise for many different reasons. For starters, unless you happen to be Steak n' Shake (NYSE: SNS ) , you usually don't expect a casual dining chain to be able to raise menu prices on a slate of revamped premium burgers. In addition, Ruby Tuesday's solid showing may have surprised Wall Street because the company seemed a bit rudderless in terms of its identity. It was mostly a "me too" player in a crowded space, until it became a trendsetter by rolling out calorie-counting menus and healthier fare. The company still mixes up a mean salad, but its current marketing emphasis on thick burgers loaded with toppings -- something that Steak n' Shake is also doing at the moment -- is as ironic as it is refreshingly successful.
Red Hat (Nasdaq: RHAT ) was another topper. The Linux software specialist earned $0.13 a share during the fourth quarter. That was a penny better than the number-crunching analysts were expecting. Then again, it was the fourth time over the past five quarters that the company beat the Street. Even though most folks associate Linux with free software, Red Hat has been able to tack on value to the open-source platform to produce marketable products and subscription revenue. Inside Value pick Microsoft (Nasdaq: MSFT ) might not be losing any sleep over the open-source cheerleader, but Red Hat is clearly growing quickly.
Then we have Hastings Entertainment (Nasdaq: HAST ) . The heartland retailer earned $0.61 a share, while the few analysts following the company were holding out for just $0.49 a share in profits during the company's holiday quarter. Even though the company has been taken to task in the past for falling short in areas like CD sales and movie rentals, it's clearly not another Blockbuster (NYSE: BBI ) or Movie Gallery (Nasdaq: MOVI ) , nor one of the many music retailers now pushing up daisies. Hastings is a more diversified player, with book sales and video games helping to offset weakness in other line items.
Keep watching the companies that lap expectations. Over time, it will be a rewarding experience for investors -- the kind of surprise that market-watchers relish in the Rule Breakers newsletter service. Its strategy has paid off, since the average Rule Breaker selection has trounced the S&P 500's market return. Want in? Check out a 30-day trial subscription.
Either way, come back next Monday to learn about more stocks that blew the market away.
Longtime Fool contributor Rick Munarriz is a fan of toppers. He does not own shares in any of the companies in this story. The Fool has a disclosure policy. He is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
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