With earnings season just about over, it's time to size up the winners and losers.
But first, to give investors some needed context, let's see how this quarter stacked up historically. With over 92% of S&P 500 companies reporting, 74% posted a positive surprise, or beat earnings estimates, according to FactSet. In aggregate, companies reported earnings 5.3% above expectations. Looking back, that surprise is above both the one-year average (4.8%) and the five-year average (4.8%).
While that sounds like good news, it doesn't necessarily mean much. It's only one three-month period, and you need to take Wall Street analysts' tendency to lower estimates heading into earnings season into consideration. While an earnings beat or miss can give something investors to cheer, or worry about to the point of a sell-off, what matters much more is how results compare with past performance.
On that note, here's the overall sector report card. Compared to one year ago, Telecom reported the highest earnings growth (23%), while Healthcare scored second (14.6%). To no one's surprise, the oil and gas sector dragged the entire index's performance down. Energy's dismal -58.6% decline in earnings knocked the S&P 500 blended earnings growth rate down to a wretched -1.8%. Yank the oil and gas sector out (would that we could), and performance jumps to a nifty 5%.
To provide more help for boosting your portfolio, let's drill deeper for some stock-specific insight. Here's how three Motley Fool contributors sized up the surprises this quarter.
Dan Caplinger: Credit-card and electronic-payments giant Visa (NYSE:V) delivered solid earnings results earlier in November, with the company posting double-digit percentage gains in revenue and net income. Yet the surprise came from Visa's forward guidance, which included somewhat sluggish future growth. The card company said its net revenue would grow in the high single-digit to low double-digit range after adjusting for currency impacts, with the strong dollar costing Visa about three percentage points of sales growth for the year.
In particular, Visa cited issues including the strong U.S. dollar and poor macroeconomic conditions in many of its markets across the globe as holding back the company over the next year. That has forced many investors to predict a substantial deceleration in earnings growth, with the consensus forecast now calling for just 10% higher earnings despite news of a $5 billion stock repurchase that should reduce Visa's outstanding share count and push earnings per share higher.
In the long run, Visa's business looks healthy, and the long-expected buyout of the Visa Europe division should help bolster the company's prospects in the long run. Even with the potential negative surprise of less-than-stellar guidance, Visa looks like it's setting up long-term investors for strong results further down the road.
Sean Williams: We've witnessed thousands of companies report their quarterly results over the past couple of weeks, but none has been more surprising than the abominable results produced by drug developer MannKind (NASDAQ:56400P706).
MannKind's claim to fame is Afrezza, its inhaled diabetes therapy that's licensed to Sanofi. Afrezza is fast-acting, metabolizes through the body faster than tradition insulin to reduce the chances of a hypoglycemic event, and is painless since it doesn't involve a needle. But, when push comes to shove, the product isn't selling.
No one exactly expected MannKind to turn a profit in Q3, but considering that Sanofi boosted its sales force and MannKind pledged to educate physicians about their new choice in diabetes treatments, the fact that sales were flat on a sequential quarterly basis at $2.2 million (according to Sanofi) is beyond disappointing. Total sales for Afrezza are less than $6 million year to date.
Even more frightening, MannKind is taking the rare and desperate measure of selling 50 million shares on the Tel Aviv Stock Exchange to raise capital. The move should buy MannKind additional time with its cash on hand shrinking, but there may be nothing to prevent Sanofi from walking away from this deal as soon as next year.
We knew MannKind wasn't in great shape heading into this report, but the reality of MannKind's situation brings those concerns to an entirely new level.
Cheryl Swanson: With the healthcare sector stumbling, only to start skipping back up, there still may be an opportunity to buy stocks more cheaply and profit more handsomely over the long run. One healthcare stock I've been bullish about for a while is animal health company VCA (NASDAQ:WOOF). Unfortunately, I haven't taken a bite myself, and I'm kicking myself about that after its surprisingly great quarter.
WOOF's revenue hit a record, increasing 10.4% to $551.7 million. But what really impressed me was that it also reported diluted earnings per share of $0.70, which was about a 27% increase over $0.55 per share in the prior-year quarter. That 27% increase was a great acceleration over the already impressive 19% increase WOOF reported in the preceding three quarters.
The core of WOOF is its fast-growing animal hospital business, which provides over three quarters of its revenue. The company has been very aggressive on the acquisitions front, so that growth should keep pumping. Last quarter, the company acquired 19 independent animal hospitals with historical combined annual revenue of $43.6 million.
While WOOF has risen almost 10% year to date, it's well off its high thanks to a sharp sell-off in August, when the stock hit an all-time high and investors took profits. One thought-provoking reason to like WOOF is that -- despite all those "My Dog Votes" bumper stickers you see -- dogs don't really. Vote, that is.
WOOF has zero exposure to presidential candidate bickering over the ACA or attacks on biotechs or pharmaceutical companies for "price-gouging." Since we're entering an election year in which "human" healthcare is bound to be a huge hot button, I'm expecting a wild ride in healthcare stocks. Meanwhile, this could be a very good year for cats and dogs.
Cheryl Swanson has no position in any stocks mentioned. Dan Caplinger has no position in any stocks mentioned. Sean Williams has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Visa. 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.