With earnings season upon us, investors are eagerly hoping that their stocks will meet analyst's quarterly expectations. Nothing precedes stock pops (or drops) as uniformly as a quarterly report that meets (or misses) expectations.
Want proof? Look no further than relatively stable businesses CarMax (KMX 0.63%) and Tiffany (TIF), both of which slid off of 52-week highs following recent misses. If you own these stocks, you are probably wondering if you should hold on to shares. Let's take a closer look at both companies, and then at the end of this article, I'll tell you plainly how Wall Street analysts can make you rich (seriously).
Source: Ildar Sagdejev via Wikimedia Commons.
Should you sell CarMax?
It's rare to find a real bargain stock in this market. Yet, after sliding in the wake of two consecutive quarterly "misses," CarMax looks like a good deal.
What makes CarMax a bargain stock, rather than just a cheap one? It's simple: Despite missing analysts' predictions, the company actually grew substantially in each quarter.
Let's take last week's results, for example. Fourth-quarter revenue grew 9%; full-year sales were up 15%. Furthermore, net income for the full year was up a solid 13%.
In addition to the miss, some investors were worried about a 7% decline in net income, but that was simply a one-time charge due to changes in accounting. If not for the charge, net income would have been up slightly.
KMX data by YCharts. Don't buy CarMax simply because of revenue growth (above). It's not a bad place to start, though.
We know CarMax has performed well in the past, despite a decline in stock price. Let's talk about where it's headed next.
According to research firm Polk, the average age of all U.S. autos is 11.4 years, and it's expected to grow 20% by 2018. At the same time, Americans are preferring "do-it-yourself" projects over new merchandise. This all bodes well for the used car business.
That leaves only one snag to the used-car business -- namely, the used-car experience.
Which is exactly why CarMax's "no haggle" sales approach is so valuable. Considering, even with adverse weather, CarMax had a 7% jump in comparable sales, I'm betting the company is still winning over new customers.
Source: BrokenSphere via Wikimedia Commons.
Is a "miss" worth 12%?
After missing analysts' fourth-quarter earnings expectations by 4%, Tiffany's stock slid about 12%. This, in my opinion, could be a buying opportunity. Despite missing analysts predictions, Tiffany's results on a year-over-year basis were also strong.
Sales jumped 5.1% year over year, and same-store sales soared 6%. For an $11 billion business, that is solid top-line growth; earnings were also up 5% year over year.
At 18 times forward earnings, Tiffany is selling relatively cheap. The brand is truly aspirational; customers work their way up to it as a status symbol. That competitive advantage gives Tiffany pricing power, which leads to fatter gross profit margins (up 1.4 points to 60.5% in Q4).
This is a brand that was recently ranked among the world's most valuable by Interbrand. Considering the company is growing both top and bottom lines effectively, I think it'd be silly to sell shares because analysts' predictions were incorrect.
Source: Ramy Majouji via Wikimedia Commons.
Here's how Wall Street analysts can make you rich
At this point, you've probably noticed that I'm still interested in CarMax and Tiffany despite their recent "misses." The companies are performing well; so why should I care if analysts missed the mark?
And missing the mark is actually very common for these analysts. In fact, studies have shown that analysts' earnings predictions are wrong more than half the time; some studies show their accuracy to be as low as 29%.
So, here's how Wall Street analysts can really make you rich: You can get rich by ignoring them.
That's right: If you resist the urge to sell on quarterly "misses," and stay focused on real business performance, your returns will satisfy. Even better, considering how often analysts "miss," and how stocks usually sell off when they do, why not use it as a buying opportunity?
Keep a shortlist of great stocks, and when they sell off for no reason other than a "miss," buy some shares. Earnings misses, in some cases, can be your greatest buying opportunities.
