Market Outlook: Should Investors Be Worried About Q3 Earnings Season?

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October 11 kicks off earnings season for the third quarter, with Alcoa leading the roster. Given the heightened volatility of these last couple of months, many investors don't know what to expect, but one report from UBS (via Business Insider) suggests we shouldn't fear the worst.

Earnings season (the quarterly time of year when companies announce their profits from the latest quarter) usually isn't met with so much uncertainty, but this summer saw a lot to cause concern. The U.S. was given a credit downgrade for the first time in history after the whole debt ceiling fiasco, the stock market plunged, and so did consumer confidence. Economic activity was likely affected by these events in the third quarter.

But according to a report from UBS, economic activity didn't disappear. UBS analyzed 19 companies that have announced quarterly earnings since August 1. (via Business Insider):

"The median company beat consensus by 3% on EPS and 2% on revenue. If we compare consensus EPS for the forward quarter (ends Nov.) as of August 25 with the current figure, it fell just 1% for the 15 firms that did not report today. (Estimates will likely rise for most of the four firms reporting today.) These revisions reflect guidance as of mid-to-late September and suggest that, while business conditions are tough, demand is not now collapsing as it did in Q4 2008. This is reassuring but no guarantee we will avoid a double-dip."

UBS goes on to say the most bearish data point was that FedEx (FDX) cut guidance because of slower imports from Asia. But on a brighter note, Nike (NKE) reported strength in nearly all regions.

For a look at companies that are reporting their Q2 earnings next week, we ran a screen based on the theoretical assumption that if P/E is equal to a constant K, growth in EPS estimates should be matched by proportionate growth in price. When they don't match up, a mispricing may have occurred, possibly indicated an undervalued opportunity.

Do you think these stocks will announce earnings surprises? Use this list as a starting-off point for your own analysis. (Click here to access free, interactive tools to analyze these ideas.)

1. Littelfuse (NAS: LFUS) : Designs, manufactures, and sells circuit protection devices for use in the automotive, electronic, and electrical markets in the Americas, Europe, and the Asia-Pacific. Earnings scheduled to be released on 10/03/11. The EPS estimate for the company's current year increased from 4.18 to 4.22 over the last 30 days, an increase of 0.96%. This increase came during a time when the stock price changed by -10.15% (from 47.37 to 42.56 over the last 30 days).

2. Medical Properties Trust (NYS: MPW) : Operates as a real estate investment trust (REIT) in the United States. Earnings scheduled to be released on 10/07/11. The EPS estimate for the company's current year increased from 0.73 to 0.74 over the last 30 days, an increase of 1.37%. This increase came during a time when the stock price changed by -8.85% (from 10.62 to 9.68 over the last 30 days).

3. Constellation Brands (NYS: STZ) : Produces and markets alcoholic beverages primarily in the United States, Canada, and New Zealand. Earnings scheduled to be released on 10/06/11. The EPS estimate for the company's current year increased from 1.97 to 1.98 over the last 30 days, an increase of 0.51%. This increase came during a time when the stock price changed by -5.69% (from 19.87 to 18.74 over the last 30 days).

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.


Kapitall's Alexander Crawford and Eben Esterhuizen do not own any of the shares mentioned above. EPS and price data sourced from Yahoo! Finance.

At the time this article was published The Motley Fool owns shares of FedEx. Motley Fool newsletter services have recommended buying shares of Nike and FedEx. Motley Fool newsletter services have recommended creating a diagonal call position in Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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