6 Stocks With Earnings Momentum, Yields

Last year in SmartMoney.com columns I outlined two seemingly opposed positions. In April I argued that buying a house in America had, broadly speaking, become a worse financial proposition than renting, and that house returns were due for a long slump. In November I called shares of paint maker Sherwin-Williams (SHW) cheap, despite its obvious dependence on a healthy housing market.

House prices since that April 2007 column have fallen 20%, judging by an S&P/Case-Schiller index of 20 U.S. cities. (Since America's home equity was roughly half paid-for before the drop, the effect on wealth has been about twice as large.) Sherwin-Williams shares have dipped about 6%, not counting dividends, which now make for a yearly yield of 2.5%. The housing plunge doesn't surprise me (prices still look unsustainably high), but Sherwin-Williams' performance does. I certainly didn't foresee the S&P 500 index plunging 43% when I wrote that November 2007 column. How has a company that's linked to one of the market's weakest industries escaped more or less unscathed?

For one thing, Sherwin-Williams was already cheap. Shares a year ago were discounted to the broad market by at least 20%, based on their price/earnings ratio, and Sherwin had turned up on a search for companies that were priced for takeover appeal. Also, profits have been better than expected of late. In its past two quarters -- the all-important outdoor painting season in many American states -- the company has beaten expectations by double-digit percentages.

The outperformance is owed in part to Sherwin reining in Wall Street's earnings expectations back in March, citing the housing downturn and record oil prices at the time, which made paint production more expensive. Earnings are still sure to decline for the year, but the outlook is gradually growing less grim. Two months ago analysts expected Sherwin to earn $4 this year, down from $4.70 last year. Now they say $4.22. That's higher than the company's own guidance of $3.97 to 4.17 a share, issued in October. Despite a slip in paint volumes, revenue has increased slightly of late, thanks to acquisitions and price increases.

Paint won't be mistaken for a growth business soon, but Sherwin makes most of its money from touch-ups on existing houses, and it seems to be taking share from weaker competitors during the downturn, analysts say. Brand recognition helps, but so does financial strength. Sherwin is expected to produce close to $400 million in excess cash this year, after subtracting for investments and dividends, but not for acquisitions. That money could go to pay down debt, which at $1.03 billion has fallen from $1.35 billion at the end of the first quarter. It could fund more stock repurchases; the company bought 13.2 million shares last year and seven million so far this year. It could also allow for more acquisitions or a bigger dividend next year. Sherwin has increased payments in each of the past 12 years.

The stock's outperformance means it's not quite the relative bargain it was a year ago. Shares go for 13 times earnings, just about on par with the market. But a company that beats earnings projections in a given quarter is more likely than not to do so again in the following one, studies show. Sherwin seems to be on a roll, or at least, on what qualifies as a roll in this market.

I recently searched for S&P 500 members that beat earnings forecasts in their most recent quarters and have done so, on average, over the past year. I also looked for forecasts that had been raised for this year and next. Fewer than two dozen companies made the cut. Below are a half dozen of those that also have plump dividend yields.