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5 Undervalued Strong Buy Stocks Set to Beat Earnings Estimates

Sejuti Banerjea
·6 min read

Third-quarter earnings reports have started pouring in and there are early signs of the recovery that everyone has been talking about. Granted that some of this is tied to the stimulus, interest rates and other government initiatives to prop up the economy, but that isn’t all there is to it.

A typical recession is a condition of weak demand but in this case, underlying strong demand is unable to express itself because of health concerns. In sectors like technology, homebuilding and medical, the pandemic has induced further demand on top of the existing strength, sending these sectors right through the roof.

The banking sector is a different story, since the pandemic has severely impacted service providers, hotels, restaurants and hospitality, which employ a large number of people. And primarily, it’s people that take loans and make payments on them. Low interest rates are also a direct hit to banks’ net interest incomes.

So this is a bad time for banks. But it could have been worse. Without government initiatives, it would have been much worse. As things stand now, banking stocks are beating lowered expectations this quarter. So they may make good value plays for those investing in a market turnaround in 2021 or 2022.   

That brings us right up to the present, where the first tech reports from International Business Machines, Taiwan Semiconductor, ASML, Netflix (increasingly a media company), Snapchat, Texas Instruments and many others are already in. And we are waiting for Lam Research, Tesla (increasingly an auto player), Intel, STMicroelectronics and many others to round out the week.

Earnings season is a really good time to adjust your portfolios to get into the stocks that are positioned for upside. It’s also a good time to invest in names that can fetch neat gains within a relatively short period of time.

With that in mind, I’ve homed in on 5 stocks that are poised to beat estimates in the next few days. What’s more, you don’t have to overpay for them, because they are undervalued today!

PulteGroup, Inc. PHM

This is a homebuilding company that also offers some related financial services. It operates in the Zacks-classified Building Products - Home Builders industry, which is in the top 2% of Zacks-ranked industries. For those who don’t already know, the top 50% of Zacks-ranked industries has historically outperformed the bottom 50% by a factor of more than 2 to 1.

The Zacks Rank #1 (Strong Buy) coupled with Value, Growth and Momentum Scores of B, B and A, respectively makes PHM an attractive pick.

There’s a 4-cent increase in the Zacks Consensus Estimate for 2020 in the last 7 days, as well as a 31-cent increase in the 2021 estimate. The most recent estimate for the to-be-reported quarter is higher than the consensus, which is indicative of an earnings beat for companies with a Zacks Rank of #1, #2 (Buy) or #3 (Hold).

Valuation: The forward twelve months’ P/E is currently 10.33X, which is below the median value of 10.71X in the last 6 months. So the shares are undervalued. The six-month period seems appropriate for these stocks because they’ve been positively affected by the pandemic and are geared toward the new normal.

Meritage Homes Corporation MTH

Meritage primarily engages in building and selling single-family homes for entry-level, first-time, move-up, luxury and active adult buyers in historically high-growth regions of the U.S. So it’s in the same industry as PHM.

The stock looks really good right now with its Zacks Rank #1, Value Score B, Growth Score A and Momentum Score B.

The Zacsk Consensus Estimate for 2020 moved up 18 cents 7 days ago while the 2021 estimate moved up 95 cents. The most recent estimate for the to-be-reported quarter matches the consensus.

Valuation: The stock is currently trading at a forward P/E of 9.57X, which is below the median value of 11.17X in the last 6 months. So the shares are undervalued.

Landstar System, Inc. LSTR  

Landstar System, Inc. is an asset-light provider of integrated transportation management solutions with operations across North America and Mexico.

With a Zacks Rank #1, Value Score C, Growth Score B and Momentum Score A, LSTR is part on the Transportation – Truck industry, which is in the top 2% of Zacks-ranked industries.

A quick look at the detailed earnings estimates for the quarter shows a 40 cent jump in the 2020 estimate within the last 7 days. The most recent estimate is also slightly higher than the Zacks Consensus, indicating that a surprise is in the cards.

Valuation: The forward twelve months’ P/E is currently 24.23X, which is below the median value of 25.55X in the last 6 months. So the shares look ripe for the picking.

Covenant Transportation Group, Inc. CVLG

Covenant’s transportation and logistics services include asset-light warehousing, transportation management and freight brokerage. So it’s a part of the same industry as LSTR.

The Zacks Rank #1 company has a Value Score A, Growth Score D and Momentum Score A.

Its earnings estimate details show a 53 cent increase in the Zacks Consensus Estimate for 2020. The most recent estimate for the to-be-reported quarter matches the consensus.

Valuation: The forward P/E of 9.90X is lower than the median value of 20.94X in the last six months. So this appears to be a good time to jump in.

Axalta Coating Systems Ltd. AXTA

Axalta makes waterborne and solvent borne coatings; liquid and powder coatings; and liquid coatings. Its solutions include paint, color matching tools, application technologies and customer training, support and business management systems for manufacturers of light and commercial vehicles, the refinish aftermarket and industrial applications.

The Zacks Rank #1 company has a Value Score D, Growth Score F and Momentum Score A.

Its earnings estimate details show a 3 cent increase in the Zacks Consensus Estimate for 2020 and a 4 cent increase for 2021. The most recent estimate for the to-be-reported quarter is higher than the consensus, increasing the chances of an earnings surprise.

Valuation: Its forward P/E of 18.42X is below the six-month median of 19.22X, indicating that the shares are undervalued.

Conclusion

The recent revision in estimates for these stocks don’t look priced in. So this seems to be a good time to invest in the shares.

 

5 Stocks Set to Double

Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.

Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.

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PulteGroup, Inc. (PHM) : Free Stock Analysis Report
 
Meritage Homes Corporation (MTH) : Free Stock Analysis Report
 
Landstar System, Inc. (LSTR) : Free Stock Analysis Report
 
Axalta Coating Systems Ltd. (AXTA) : Free Stock Analysis Report
 
Covenant Transportation Group, Inc. (CVLG) : Free Stock Analysis Report
 
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