In a Turbulent Stock Market, Look for Earnings Consistency

With Asia-related profit worries causing heartburn up and down Wall Street, what's it take for a stock to go up these days?

In a nutshell, earnings consistency.

Despite the market's partial rebound Tuesday, stock prices are likely to remain under pressure in coming weeks until Wall Street gets a handle on the extent of profit damage caused by Asia.

That means the stocks of companies coming through with reliable earnings should go up, even if those profits don't seem all that special in absolute terms.

In particular, experts recommend stocks of retailers, home builders and other domestically oriented industries. Investors also should pay attention to the small number of companies that make positive "pre-announcements" indicating that their businesses are strong and could be getting better.

"Particularly in times like this, you ought to be looking at people who are saying things are going to be better than you thought, and you should even look at people who say they're going to meet expectations," said Chuck Hill, research director at First Call Corp., a Boston firm that tracks earnings.

There's no question that the troubles of the Japanese yen and sagging Pacific Rim economies are jeopardizing U.S. earnings. Profits in various sectors of technology, oil, transportation and basic materials are expected to fall this quarter versus a year ago, according to First Call. That's quite a shock compared with the hefty profit gains that have been a hallmark of the 1990s bull run.

Adding to the market's chagrin lately is the fact that the quarterly pre-announcement ritual will command center stage for the next three weeks. This is the period at the end of each quarter in which companies, most with bad news to report, disgorge it early in the hope that their stocks can later recover.

"We're seeing more misses than positive surprises, that's for sure," said Paul Wayne, research director at Kayne Anderson Investment Management in Los Angeles.

Individual investors, of course, always have the option of temporarily exiting the market and holding cash until the outlook clears up. But many are loath to do that for fear of missing another of the innumerable rallies that have followed past corrections.

Investors braving the current market should focus on companies that are highly likely to meet earnings.

Robert Stovall, president of money management firm Stovall/Twenty First Advisers in New York, thinks home builders and their suppliers are safe bets. Not only are they helped by the surging U.S. economy, but they also have no risk from lower-priced Asian exports.

He likes two mobile-home companies: Champion Enterprises (ticker symbol: CHB) in Auburn Hill, Mich., and Skyline Corp. (SKY) of Elkhart, Ind.

As prices for conventional homes rise beyond some buyers' price ranges, mobile homes have become a stronger alternative. Besides, manufactured units increasingly feature such amenities as bay windows and full kitchens that help them compete against traditional homes.

Stovall also likes Lowe's Cos. (LOW), the home-improvement company, and Masco (MAS), which makes such things as faucets, whirlpools and cabinets. Masco said Tuesday that its second-quarter profit will rise about 15% over last year.

Among retailers, Stovall likes Sears Roebuck (S) and Jacobson Stores (JCBS), a Midwest department store chain. He also likes Greyhound (BUS), which is making a comeback from financial troubles and is being helped by lower gasoline prices.

Marc Greenberg, a money manager at Avatar Associates in New York, suggests supermarket chains Kroger (KR) and Safeway (SWY). The companies have good management and have proved that they can make money in a tough pricing environment, he said.

Greenberg also suggests consumer-products companies such as Colgate-Palmolive (CL), Procter & Gamble (PG) and Sara Lee (SRE). Their operations are geographically diversified and should withstand downturns in individual countries, he said.

Greenberg advises against utilities, which are a traditional refuge in turbulent times. In part because the stocks have rallied, dividend yields have fallen.

And since earnings aren't growing noticeably, the stocks aren't worth it, he said.

One strategy for investors is to buy stocks of companies that have released positive pre-announcements in which they promise that earnings will beat Wall Street estimates.

Though only a handful of companies have made such announcements lately, they're at least worth checking out because they're telegraphing that their fundamental businesses are strong.

The chart accompanying this story lists a few companies that have issued positive pre-announcements this quarter.

With investors focused on bad news at the moment, investors shouldn't expect immediate gains in these stocks, Stovall said. But some could provide solid returns over the longer term.

"It may not get that [immediate] impact, but it tells you the companies are reporting above-estimated earnings and that they have products or services that are in demand," Stovall said.

For an example of how a positive pre-announcements can affect a stock, consider consumer electronics retailer Best Buy (BBY).

For its fiscal fourth quarter that ended in February, the company released two pre-announcements advising analysts to boost estimates, according to First Call. And though analysts raised their projections, Best Buy still topped them.

The pattern was repeated for the fiscal first quarter ended in May. The company released a positive pre-announcement on June 4, saying it would earn up to 15 cents a share. The final number was 16 cents when Best Buy released the official results Tuesday. Though the company's stock price fell Tuesday, it has risen more than sixfold in the last year.

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Street Strategies explores investment tactics. Times staff writer Walter Hamilton may use strategies he writes about in his personal account. He can be reached by e-mail at walter.hamilton@latimes.com.

* REVERSAL: Stocks gain a bit. D4

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Beating the Numbers

Even as many companies warn investors that their profits will fall shy of analyst estimates, a handful of others have told Wall Street that their earnings will exceed projections. Five such optimistic companies, with analysts' pre-announcement estimates of quarterly earnings per share and the companies' own announced estimates:

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Ticker Tuesday Pre-announ. Company Company symbol close EPS estimate estimate Microsoft MSFT $89.88 $0.46 $0.47 Ford Motor F 52.00 1.66 1.76 Circuit City CC 45.69 0.04 0.13 Echlin ECH 47.88 0.69 0.74--0.79 DM Management DMMC 31.44 0.32 0.38--0.40

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Source: First Call Corp.

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