Now that the third quarter has concluded, it is time to brace for another earnings-reporting season. Much of the recovery has started to slow in the past four to six weeks, and a failure to reach a stimulus package leaves more questions about the recovery than it offers answers. The second full week of September will bring the start of major corporate earnings, and on top of earnings, the investing community and economists will be paying very close attention to forward-looking guidance for how the end of 2020 appears to be looking.
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24/7 Wall St. covers many of the top corporate earnings throughout each earnings season. While there is a longstanding guessing and forecasting game about which companies will beat expectations, another effort worthwhile is trying to decide which stocks are set up to have explosive upside if there are any positive surprises. 24/7 Wall St. is not previewing every single earnings report for the Dow Jones industrial average, but we do want to see which of the Dow stocks could most easily see their shares surge after earnings.
Before getting into predictions, the first consideration needs to be that no one will be able to pinpoint consistently every earnings report ahead of time. What is possible ahead of earnings is to decipher which stocks are already priced for perfection, compared with those stocks that have very low expectations heading into earnings. In the latter group, sometimes even less than robust news can be received quite well by investors.
The stock market does of course react to news about past quarters, but the real game in investing is to remember that the stock market is effectively a real money vote about where things will be in the coming quarters. Sometimes it is the worst-performing stocks that offer the biggest upside gains. Other times, the previous winners keep on winning.
We have selected the top two performing Dow stocks, as they are both defensive and have their “forever” appeal to investors. We have then selected seven in which expectations are not overly elevated and where any additional positive views ahead could create sizable upside for their stocks. All consensus analyst price targets and earnings expectations come from Refinitiv.
Can Apple and Salesforce Hold Their Leads?
Apple Inc. (NASDAQ: AAPL) has been the best performing Dow stock, with a gain of 54% year to date. Salesforce.com Inc. (NYSE: CRM) is among the newest Dow stocks, and its gain, after joining the Dow and after its most recent earnings report had its stock up almost 54% so far in 2020. This does not assure that Apple and Salesforce are priced for perfection, but the companies cannot expect shareholders to be very happy if they post bad earnings and have weak guidance.
The good news is that Apple is the biggest company in the world and now has a defensive stock status in the age of COVID-19. Apple has its upcoming iPhone 12 and the coming supercycle, and that likely will be previewed before the company’s earnings report, but it already had its euphoric trading after its last stock split. Some even think Apple should be a stock to own forever.
Salesforce is still up well over 20% from when it was announced as the newest Dow member, and then its earnings beat in August. The company has a much later earnings report due to a different reporting cycle.
Intel Tries to Recoup Its Losses
Intel Corp. (NASDAQ: INTC) was brutally punished after its last earnings report contained a delay in being able to roll out smaller and more advanced chips. With shares back above $52, the stock is acting like it is ready to close the gap from its prior report, when shares fell from above $60. Intel is also valued at only about 10 or 11 times expected earnings, and it still yields close to 2.6%.
With all the focus on Nvidia/ARM and AMD, Intel’s dominance in the computing world is under fire. Still, with over $20 billion of operating income and a strong balance sheet, Intel has every opportunity to recapture some of its losses at a time that its direct peers are priced high enough that they have to keep outperforming expectations over and over.
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