There’s an old saying on Wall Street that says, “analysis of the averages produces average analysis.”

The “averages” refers to the popular indexes, while the saying is a nod to missing opportunities if you only focus on what they’re doing.

And I can’t think of anything truer when it comes to corporate earnings.

So today, I’ll share three companies with rising profits despite the market’s negative earnings growth…

Moving in the Wrong Direction

About 82% of the companies in the S&P 500 have reported earnings for the fourth quarter.

And while 68% are beating their earnings estimates for the quarter, the growth rate in earnings has fallen into negative territory for the first time since 2020.

Even more concerning is that forecasted earnings are also moving in the wrong direction. Back at the end of December, analysts pegged S&P 500 earnings growth at about 5% for 2023.

Now, earnings growth for the next 12 months has also turned negative.

But here’s the thing… the news on the earnings front isn’t bad everywhere. You just have to look beyond the S&P’s uninspiring figures.

In fact, if you dig into the details, you can find companies in the midst of a profit boom.

That’s why I turn to a special type of quant factor to pinpoint companies expecting growth… and it’s one that’s generated outsized stock returns historically.

Tracking Profits with Analyst Revisions

Many investors mistakenly think that a high level of earnings is the trick to finding stocks that’ll outperform.

But when it comes to corporate profits, you should focus on the trend instead.

That’s also known as analyst revisions, which reflects how quickly Wall Street analysts are raising or lowering profit estimates for companies.

And targeting companies with the largest positive change in revisions has historically been a great way to beat the market.

I’ve verified that in my own studies. My revision factor is made up of things like sales and earnings estimates, so I can track which stocks are seeing the best improvement in their financial outlook.

Top companies based on my analyst revisions factor have delivered just over 18% in annualized returns going back to the start of 2010… far outpacing the benchmark.

That’s why looking beyond the averages can guide you to better opportunities than what the indexes have to offer.

Here’s where my analyst revisions factor says the profit outlook is improving now…

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Boosting the Bottom Line

I watch my analyst revisions factor like a hawk during earnings season.

As companies release their quarterly financial reports and discuss the outlook, analysts change their estimates to reflect new information.

That makes it a great time to scour the stock universe for companies seeing a big markup in their financial projections.

That’s especially the case in this market environment, where companies that can buck the trend of weaker profit outlooks will stand out.

Here’s a peek at three stocks to keep on your radar. They have released earnings and are now ranked among the top for their analyst revisions score:

  • Dynatrace (DT)

  • Applied Industrial Tech (AIT)

  • (MNDY)

So don’t believe everything you see in the headlines about the path of corporate earnings.

There are companies bucking the trend and growing their profit estimates… and those are the ones that historically deliver superior returns.

Best regards,

Clint Brewer
Analyst, Market Minute

Reader Mailbag

In today’s mailbag, we hear from a member of Jeff Clark Trader

Good call on the latest put recommendation. I got 10 contracts at $1.50, sold three at $2.93, and another two at $3.00 so far.

– Steve B.

Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at [email protected].