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2 Stellar Stocks for Earnings Season

Another theme for many of these "estimate-beaters" is that the strong results may not last. For example:

  • Industrial conglomerate Textron (TXT - Get Report) posted solid profit margins, thanks to still-strong results at its Bell Helicopter division. But the Textron's Cessna plane division is struggling for new customers, and quarterly results may weaken in coming quarters.
  • Knight Capital (KCG - Get Report) strongly benefited from the stock market volatility in July and August, which created wide bid/ask spreads in its market-making business. Volatility dropped in September and the current quarter is unlikely to deliver the same upside surprise.
  • Cytec Industries (CYT - Get Report), which makes a range of industrial paints and resins, saw robust demand last quarter, but has already seen business slow more recently and is hunkering down for a period of upcoming softness by closing a key plant in Brazil.

The key for "upside-surprise" plays is to find companies that can sustain their momentum. I think I've found one of them, in addition to Citigroup. That's Noble Energy (NBL - Get Report).

This oil and gas driller showed strength throughout the income statement. Especially productive wells allowed Noble to produce roughly 3% more oil and gas than analysts had anticipated, and the costs to dig new wells also came in lower than expected. The current quarter should be equally impressive as new wells could come online a quarter before many analysts had expected. "It's rare that you have the combination of production, development and exploration all peaking at the same time for one company," note analysts at Sterne Agee, who carry a $107 price target on the stock.

Noble has built an impressive slate of development projects, from Israel to West Africa to U.S.-based shale plays and the Gulf of Mexico. The recent quarterly results are part of an ongoing trend: Management tends take a very conservative stance to costs and development schedules and then typically comes in ahead of plan.

That's why the company has topped the consensus earnings estimate by at least 12 cents a share in each of the last three quarters and will probably keep doing so as new energy projects start to come online later this quarter. Analysts at Citigroup figure a steady jump in cash flow per share, from $1.47 a share in 2011 to $16.50 a share in 2012 and $18.87 a share in 2013 puts fair value on the stock at $110 -- almost 25% above current levels. And that upside comes with still-depressed natural gas price forecasts.

Risks to Consider: A still-weak economy should lead you to closely scrutinize recent results as well as the assumptions built into forecasts for future quarters. It's best to avoid assuming costs can be cut much more, so future "estimate-topping" results will likely only come from company-specific growth drivers or a strengthening economy.

Action to Take: Even with the banking and natural-gas sector experiencing challenging environments, Citigroup and Noble Energy still managed to deliver solid numbers. Citigroup brings significant potential upside along with ample risk, while Noble offers decent upside with likely limited risk.

Disclosure: Neither D. Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

Also read:

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.
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