Not a Spectacular Quarter, But Still the Best in the Space
Shares of retailer Costco Wholesale Corporation (NASDAQ:COST) came close to touching new highs on Monday, increasing 1.29% following an earnings report that met expectations. The company saw top-line growth of 8% year-over-year (yoy), which was fueled by a 15% rise in membership fees. More importantly, this rise was due to volume, not a price hike. Looking ahead, the company continues to see strong performance in same-store sales, and so far, has fared well against Amazon.com, Inc. (NASDAQ:AMZN)’s Prime membership.
Personally, I wasn’t too impressed with Costco’s quarter, but I think what impressed the Street is that the company did not see the same struggles experienced by Target Corporation (NYSE:TGT) or Wal-Mart Stores, Inc. (NYSE:WMT) in the quarter. With that being said, I was very impressed with its 39% rise in net profit, despite a $62 million tax benefit. This is a company with a lot of room to grow, trading with operating margins of just 2.82%. Therefore, with it being cheaper on a price/sales basis than either Target or Wal-Mart, and seeing greater growth, I think COST is a “buy” and is the best of the three.
Strong Growth Under-Performing Stock that is a ‘Buy’
BioScrip Inc. (NASDAQ:BIOS) saw a 12.57% rise on Monday, touching new highs, after an earnings report that beat expectations. First, the company saw top line growth of 14.2% and posted sales of $180.7 million, $6.83 million better than the consensus. Then, it posted an EPS of $0.04, which was $0.03 better than analysts expected. Furthermore, the company’s full-year revenue guidance between $830 million and $865 million trumped the consensus of $770 million.
BioScrip Inc. (NASDAQ:BIOS) has seen a 76% rise over the last year, however after this quarter, the stock is being added to my Motley Fool “CAPS” list the minute I am done with this paragraph. It is a stock with double-digit growth that continues to trade with a price/sales far below 1.0. It is a small under-the-radar company that often gets forgotten in the discussion of best small cap stocks. But in my opinion, this is a good investment for the next year to come; it’s simply too cheap compared to growth and that distinction will create value for shareholders.
Overvalued Stock with Minimum Fundamental Growth Creates Value Trap
iRobot Corporation (NASDAQ:IRBT) saw a 5.19% rise on Monday after the company issued slightly higher guidance for Q1. The company is now expecting Q1 revenue between $102 million and $104 million (up $2 million from prior guidance) and EPS between $0.16 and $0.20. To me, the revenue is important with this company, because iRobot Corporation (NASDAQ:IRBT) is a near zero growth company coming off a bad year. In Q1 I was looking for measureable upside and growth, but instead we get 5% growth guidance.
In my opinion, this is not a value stock and the upside is very limited. The stock trades at 39 times earnings and has a price/sales ratio of 1.45. With the stock trading in the consumer cyclical space, I view these metrics to be too expensive and would not buy a near zero growth company at this price.
Conclusion
In my book, Taking Charge With Value Investing (McGraw-Hill), I examine human behavior and the psychological effects that take place in the minds of investors when a stock shoots higher or falls drastically lower (think roulette at a casino), with one scenario being earnings. For many investors, chasing these trends is common, even addicting, and very few are capable of realizing their losses because of their occasional gain.
Investors need to avoid this behavior after earnings, and look not at the performance of the stock but rather the performance of the quarter. By doing so, you will be able to find the inconsistencies and a distinction between performance and fundamentals, which creates value and allows for large returns.
The article 3 Post-Earning Outlooks for Top Movers originally appeared on Fool.com and is written by Brian Nichols.
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