Analysts have been cutting back their earnings forecasts going into the fourth quarter of 2011, and especially in the first quarter of 2012.
It can't be said that companies haven't prepared themselves for volatility in the market -- companies hoarding cash have been a prevalent indicator -- but have companies prepared for such length and severity? According to analysts, that's not an easy feat, and it's nearly time that economic woes impact corporate profits.
According to CNNMoney, amid uncertainty of the market's future, high unemployment, a stalled economy, and the growing international financial crisis, "the target growth rate for S&P 500 earnings fell to 12% in the past week. That's down from 17% a year ago."
A 12% growth rate would "mark the slowest growth pace for earnings since the recession officially ended in 2009."
Other analysts, according to CNNMoney, suggest that it is too soon to make these assumptions. "The market is overacting," said Kate Warne, chief investment strategist with Edward Jones, "stocks have sold off dramatically, but the business climate hasn't changed all that much."
Still, many companies have been the first to admit there may be trouble ahead by cutting their own sales forecasts in anticipation of the year's market volatility.
Yet no matter what happens, as always, some winning companies will come out of market changes unscathed.
To help you identify these outliers, we searched for the top 10 rallying stocks that have seen a raise in their EPS estimates for the current year while also seeing a drop or smaller rise in price (i.e., these companies may be undervalued):
The logic of this technique is as follows: If the price/earnings per share ratio is equal to some constant k, it reasons that there should be a linear relationship between price and earnings per share. In other words:
If P/E = K
then P = (K)(E)
If there is a mismatch between growth rates in projected earnings per share values and price, a mis-pricing may have occurred, presenting an opportunity to value investors.
Yes, this approach isn't 100% accurate. There is no reason to believe that P/E should be equal to a constant at all times (that is, after all, a simplifying assumption to build a screen). But the goal here is to give you a starting point in finding potentially undervalued stocks.
Analysts think earnings are going to drop, but here are a few companies with rising earnings that may even be undervalued. Do you think they have more value to cash in?
Use the list below as a starting point for your own analysis. (Click here to access free, interactive tools to analyze these ideas.)
1. Liquidity Services
2. Green Mountain Coffee Roasters
3. Sturm, Ruger & Co.
4. Cabot Oil & Gas
5. CVR Energy
6. First Majestic Silver
7. Domino's Pizza
8. SFN Group
10. Nu Skin Enterprises
List compiled by Eben Esterhuizen, CFA.
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Kapitall's Becca Lipman and Eben Esterhuizen do not own any of the shares mentioned above. EPS data sourced from Yahoo! Finance, all other data sourced from Finviz
The Motley Fool owns shares of Domino's Pizza. Motley Fool newsletter services have recommended buying shares of Liquidity Services and Green Mountain Coffee Roasters. Motley Fool newsletter services have recommended creating a lurking gator position in Green Mountain Coffee Roasters.
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.