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Profiting From Earnings Estimates Revisions

My stock pick this week is a buy long on Tech Data that comes from the recommendation of Zacks Investment Research. Tech Data is a $2.38 billion dollar company that distributes information technology products worldwide. Zacks is a high-quality stocks research recommendation service that ranks its stock picks not based on current or new earnings reports but on “earnings estimate revisions” made by all other analysts covering the stock. “Earnings estimate revisions are the most powerful force impacting stock prices” Zack Investment Research Founder Leonard Zacks, Ph.D. Mathematics M.I.T.

New Earnings Season Begins

Its earnings season again, and you might be waiting for the new earnings reports to take new positions and or liquidate old positions based on the company new earnings reports. Some market research has shown that actual earnings reports lag price performance. It’s like the old market saying, “buy on the rumor, sell on the news”. I’ll write more about company earnings reports that lag price performance on tomorrow’s blog.

Profiting From Earnings Estimate Revisions Versus Actual Earnings Reports

A company’s current earnings report is a snapshot of past performance, and when purchasing a stock you are buying into their potential future earnings, so anticipating future earnings through analysts estimate revisions is one very good way to find new profitable stock positions as Leonard Zacks M.I.T. Ph.D. has found. Professional stock analysts have fundamental, technical, and computer crunching resources most people don’t have to best analyze companies and provide on-going earning estimate revisions on a stock.

3 Reasons Stocks Can Drop After an Earnings Surprise

1) Estimates vs. Expectations: The standard definition of an earnings surprise is when actual earnings come in higher than earnings estimates. But those estimates are the "published" numbers from the brokerage analysts. Quite often investors tend to develop their own unique set of expectations that can differ greatly from the Wall Street analysts. If there is too much optimism ahead of the release, then actual earnings will need to be a blowout in order to appease investors' inflated expectations. This is the most common reason why some stocks fall after a "supposed" earnings beat.

2) Quality of Earnings: The highest quality earnings come from having robust revenue growth. This means that the company's products or services are in high demand and should stay that way. However, these days far too much of the earnings being reported is generated from cost cutting and other "accounting gimmickry". The problem is that the benefits of these moves don't last. When the market gets a whiff that the earnings are unsustainable, no matter how strong the beat, shares will most likely drop.

3) Forward Guidance: Plain and simple, when you buy a stock you are taking an ownership stake. And what owners of companies care about is the stream of future earnings. So if a company beats earnings for the quarter just reported, but warns that future quarters will see lower earnings, then that stock will go down...and go down fast.

An Earnings Surprise

Tech Data Corp Ticker TECD has pleased investors with yet another earnings surprise since being featured as a Zacks Rank Buy in late 2010. Shares are pushing new highs, but remain a bargain and are expected to continue to grow at double-digit rates.

Another Earnings Surprise

On March 1, 2011 Tech Data reported its ninth consecutive earnings surprise after it wrapped up a "record-setting year." Fourth-quarter sales were up 13.3%, to $7.1 billion on a year over year basis and a 15.5% jump sequentially to beat revenue expectations. Net income rose 10% to $77.3 million for the period, which broke down to $1.63 per share. EPS was up 18 cents and beat the Zacks Consensus Estimate by 20 cents.

Optimistic Outlook

Tech Data said it expects double-digit growth for its operating income, net income and EPS for fiscal 2012 as well as added $100 million to its running share repurchase program. Analysts took it all in and raised full-year estimate for both fiscal 2012 and 2013. Forecasts for the current year jumped 32 cents, to $5.03, which is a 15% growth rate. Next year's projections are up 24 cents to an average of $5.54, a 10% growth rate.

Trading at a Discount

Shares of TECD are trading at just 10 times forward estimates and have a PEG ratio of 1.0. Both of those are pointing to a solid value. The case is strengthened by a 0.1 P/S and 1.12 P/B.

The Technical Chart

While the stock is pressuring its recently set multi-year high investors may be a bit gun-shy. But, if you take a look at the steady earnings growth, it should quell those fears.

A Cautionary Note

One of Tech Data’s directors Raymund Steven recently sold 81,251 shares for a total amount of $4,063,784. Insider trading transactions can be a sign of what the future holds for a company but no one ever really knows without asking a company director why he bought or sold and the amount he bought or sold. Company insiders in the past have been known to buy and sell their own company shares too soon, so that may be of more comfort to you if you’re considering buying Tech Data here. On the other hand maybe Raymund Steven knows something the analysts don’t know yet.

Tech Data Breakout?

Tech Data’s all time high is about 55. During the market meltdown of 2008, Tech Data shares hit a low of 15, and then rebounded from there starting in 2009. If you’re buying on earnings, Tech Data has been meeting and beating its earnings estimates lately. The question now, will that continue? In case they don’t and the stock price reverses for whatever reason, stick to stop-loss to survive and invest trade another day. Regardless of earnings, the majority of all stocks follow the broad market, and if another large extended broad market sell-off comes, good earnings and other positive reports may not matter if and when it comes to a large market sell-off and having to liquidate and protect your cash.

Buy Long Tech Data - Ticker TECD

Buy Entry: 49.94 to 52.92

Stop-Loss: 45.95

Take Profit Areas: 56.00, 60.00, 64.00, 68.00, 72.00

Tech Data Company Profile

Tech Data Corporation distributes information technology products, as well as offers logistics management and other value-added services in North America, Latin America, and Europe. It sells microcomputer hardware and software products to value added resellers, direct marketers, retailers, and corporate resellers. The company also provides a range of services, including training and technical support, external financing options, configuration, outbound telemarketing, marketing, and product integration services, as well as a suite of electronic commerce solutions comprising on-line order entry and electronic data interchange services. Tech Data Corporation was founded in 1974 and is based in Clearwater, Florida.

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