We just entered the fourth week of Q3 earnings season, and it's still going strong with over 1,200 companies reporting their earnings just this week. Given the big impact that quarterly earnings reports have on stock performance, investors should pay close attention to their favorite companies.
But how do you choose which ones to watch? With so many reporting earnings, it can be hard to narrow down your list. One way is to start with companies you think are undervalued -- a surprisingly good earnings report could send the stock to its fair value. As a proxy for fair value, one option is mean analyst target price.
Using target prices
Target prices reflect analyst expectations of where a stock should move in the near future. When a stock is trading at a significant discount to its target price, it may indicate that the stock is undervalued to its fair value.
But target prices are notorious for being inflated, just as analysts are perennially optimistic about next year's stock performance. To correct for this, it's helpful to look at the most pessimistic of target prices for a stock.
Screening the earnings roster
We wanted to demonstrate these ideas by running a screen on next week's reporting companies for those trading at significant discounts to their analyst target prices.
We only focused on companies that have more than five analyst target prices (to make sure we only focus on companies that have decent analyst coverage), and we used the most pessimistic analyst target prices as the benchmark for our analysis to control for target price inflation.
Do you think these stocks will get the momentum they need from this earnings season to meet their target prices? Use this list as a starting point for your own analysis.
List sorted by potential upside implied by target price. (Click here to access free, interactive tools to analyze these ideas.)
1. WuXi PharmaTech (Cayman)
2. Vantage Drilling Company
3. Body Central
5. AerCap Holdings
6. Jiayuan.com International
7. MYR Group
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 Alexander Crawford does not own any of the shares mentioned above. Target price data sourced from Thomson/First Call (via Yahoo! Finance).
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