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Stockpickr: Two Stocks With Stellar Earnings

James Altucher

If, for instance, a company is trading at a price-to-earnings ratio of 10 based on last year's earnings but next year will be at 50, its stock might be expensive. And yet this presents the obvious challenge -- how do you know what next year's earnings will be?

You can't know it. That's where the analysis begins -- you talk to sellers or users of the company's products. You look at the past successes of analysts covering the stock. You look at the hedge funds that own the stock -- are they reliable?

One portfolio on Stockpickr, Top Earnings Champions, offers a list of more than 30 stocks that have 10 consecutive years of earnings growth. If a company grew earnings through the bubble and bust, through peace and war, boom and recession, every year for the past 10 years, then it's reasonable to believe it will continue to grow in the next year.

Let's look at two names from the list.

First up, Expeditors International(EXPD - Cramer's Take - Stockpickr). Forgetting all about its 10 straight years of earnings growth, this logistics company is remarkable because of the brutal honesty in its Securities and Exchange Commission filings. It compiles a Q&A based on inquiries it gets from shareholders and publishes the results in an 8-K filing. Here's the first question from the company's most recent 8-K:

[Question] 1. Operating income combined in the Far East and Australia/New Zealand declined by about 4% [...] Discuss the drivers of the deteriorating operating performance. When do you expect to see positive year-over-year EBIT in the Far East again?

[Answer] "Drivers of deterioration" seems to us to be kind of an overstated use of alliteration. However, your question about Asia and Australia/New Zealand's comparable fourth-quarter performance in 2006 versus 2005 is certainly worthy of comment...

The next thing to notice about Expeditors is its pristine balance sheet: $512 million of cash in the bank and zero debt. The stock trades at a 28 forward price-to-earnings (P/E) ratio with 23% return on equity. It generated earnings per share (EPS) of $1.07 last year, with $1.26 expected this year (17% growth) and $1.52 next year (20% growth).

One of my favorite firms to piggyback, Ruane Cunniff's Sequoia Fund, owns shares of Expeditors. When Buffett shut down his hedge fund in 1969, he directed investors to invest with Ruane, Cunniff & Goldfarb, and the results have been very successful; the average annual return since then has been 15.68%.

The fund actually closed to new investors in 1982. However, because the fund is a long-term investor, it pays to check out the Sequoia Fund's holdings to see other interesting plays including long-term holdings in such stalwarts as Berkshire Hathaway(BRK.A - Cramer's Take - Stockpickr) and Wal-Mart(WMT - Cramer's Take - Stockpickr).

Another great value fund invested in Expeditors is the Columbia Acorn Fund, which has a five-star Morningstar rating and a five-year average annual return of 17%.

O'Reilly Automotive(ORLY - Cramer's Take - Stockpickr) is another stock that is on both the Top Earnings Champions list and owned by the Sequoia Fund.

In addition to its 10 years of earnings growth, analysts expect O'Reilly to increase its EPS of $1.55 in 2006 to $1.78 in 2007 and $2.07 in 2008. Despite the automotive-parts retailer's consistent growth, the general slump in the automotive industry has affected this stock, which only trades at 11 times last year's cash flows and about 9 times 2007 cash flows.

Karsch Capital, which is run by George Soros protege Michael Karsch, counts O'Reilly among its holdings. Karsch not only likes O'Reilly Automotive but also is an activist on CSK Auto(CAO - Cramer's Take - Stockpickr). On Feb. 20, Karsch sent a letter to the CSK board requesting that the company initiate a "sale process immediately" to sell the company.

Karsch, who left Soros' firm at the very peak of the tech bubble, is also a fan of the cheaper tech stocks, like Applied Materials(AMAT - Cramer's Take - Stockpickr) and E*Trade Financial(ETFC - Cramer's Take - Stockpickr). You can check out all of Karsch's holdings on Stockpickr.

And for the rest of the "top earnings champions," see their portfolio page on Stockpickr.

Stockpickr tip of the day: With the S&P 500 basically flat on the year now, it's worth noting that Barton Biggs, the former chief strategist at Morgan Stanley, who now runs multibillion-dollar hedge fund, Traxis Partners, is very bullish. On Bloomberg TV the other day he stated he believed the market could be up 15% this year.

Biggs' main bet is to play the large-caps. He's invested in the iShares S&P 100 Index Fund(OEF - Cramer's Take - Stockpickr), which is simply the exchange-traded fund for the S&P 100 (way to take risks, Barton!) and the Nasdaq 100 Trust(QQQQ - Cramer's Take - Stockpickr).

He also owns some of the mega-caps like Exxon Mobil(XOM - Cramer's Take - Stockpickr) and AIG(AIG - Cramer's Take - Stockpickr) as well as the big banks like JPMorgan(JPM - Cramer's Take - Stockpickr), Morgan Stanley(MS - Cramer's Take - Stockpickr) and Goldman Sachs(GS - Cramer's Take - Stockpickr).

But I'm intrigued by some of the sectors he's betting on. For instance, Biggs is long Continental(CAL - Cramer's Take - Stockpickr), US Airways(LCC - Cramer's Take - Stockpickr) and AMR(AMR - Cramer's Take - Stockpickr), airlines all trading at 6 times cash flows, which tells me the market thinks their cash flows won't last. If they do, then these stocks have 20% to 50% upside in them.

Biggs is also making a big demographic bet on pharma and biotech with holdings like Johnson & Johnson(JNJ - Cramer's Take - Stockpickr), Wyeth(WYE - Cramer's Take - Stockpickr) and Abbott Labs(ABT - Cramer's Take - Stockpickr). You can check out all of Barton Bigg's holdings on Stockpickr.