Four things bode well> for the stocks listed below. First, they all traded at low prices relative to their earnings, a good (but not infallible) sign of handsome returns to come. Second, each company recently reported earnings that easily exceeded Wall Street's expectations. Long-term studies show that one upside earnings surprise is more likely than not to be followed by another because analysts are slow to react to new information by changing the assumptions behind their earnings forecasts.
Third, these companies recently beat sales projections, too. That's an important signal that the outperformance is coming from more than mere cost-cutting. In a 2006 study published in Financial Analysts Journal, shares of companies that had topped earnings forecasts alone went on to beat the market by three percentage points a year, while those that topped sales forecasts, too, beat the market by more than five percentage points a year.
Fourth, these companies pay dividends. Confidence helps when it comes to value investing, but quarterly cash payments help more.
Report date: April 19
Earnings per share surprise: 31%
Sales surprise: 11%
Intel (INTC) reported a 29% earnings jump on a 25% improvement in sales. Sales increased 17% at its PC Client Group, which includes home computers, and 32% at its Data Center Group, which includes corporate server chips. Sales of Atom hardware for mobile computing rose 4%. The results defied industry reports of a PC slowdown and showed that Intel's new lineup of zippy chips are fetching premium prices. In a press release, the company said full-year sales might increase 20% -- versus Wall Street's forecast of 14% sales growth. During the first quarter, Intel spent $4 billion, or nearly 4% of its stock market value, to repurchase shares. The stock jumped more than 6% on the earnings report. It still trades at just 10 times forecast 2011 earnings -- and the earnings forecast seems sure to rise in coming days as analysts revisit their projections. The dividend yield is 3.4%.
Freeport McMoRan Copper & Gold
Report date: April 19
Earnings per share surprise: 25%
Sales surprise: 8%
Miner Freeport McMoran (FCX) reported a 57% increase in earnings per share Wednesday. Shares gained more than 3%, but still fetched only nine times the 2011 earnings consensus held by Wall Street before the latest earnings report. The modest valuation might reflect investor doubt over precious metals remaining quite so precious. Gold on Tuesday topped $1,500 per ounce, having tripled since December 2005. Freeport brass seems optimistic. The company announced an increase in its 2011 exploration budget from $200 million to $225 million and said it expects to increase investments on mines and equipment, too. The stock's dividend yield is 1.9%, and although Freeport will pay only about 17% of this year's projected earnings as regular dividends, the miner is no hoarder. Management redeemed $1.1 billion in debt on April 1, a day after the company's first financial quarter closed, and on Wednesday said it would pay a supplemental dividend of 50 cents per share, or 0.9%.
Report date: April 18
Earnings per share surprise: 7%
Sales surprise: 2%
Earnings per share for drug maker Eli Lilly (LLY) fell 16% during the company's first quarter on charges related to layoffs and a new diabetes drug partnership with Germany's Boehringer Ingelheim. Absent the charges, earnings per share rose 5%. Sales increased 6%. Eli Lilly faces looming patent expirations on key drugs that rival those of any major drug maker. Unlike its peers, however, the company has thus far used its cash for internal growth efforts, not large acquisitions. Its shares yield 5.4%, versus 3.9% for Pfizer (PFE) and 4.5% for Merck (MRK) . Jon LeCroy, who covers the stock for Hapoalim Securities, the broker-dealer arm of Israel's largest bank, wrote in a note to clients that first-quarter sales of most Lilly drugs beat his expectations. Cymbalta for depression and Zyprexa, an anti-psychotic, were standouts on international sales growth. LeCroy upgraded his recommendation on the stock to "buy" from "hold," noting that Lilly still has patent and pipeline concerns but that its shares look 14% cheaper than those of peers relative to earnings.