NEW YORK (TheStreet) -- The third week of earnings season is now upon us, and investors appear to be bracing for more "Chipotle-esque" surprises.
But if they were paying enough attention, they would have realized that Chipotle's (CMG) results were not much of a surprise at all. While earnings can be an excellent time to buy undervalued stocks, on the flipside, the slightest miss in execution will punish those who are priced for perfection, as was the case for Chipotle.
This punishment does not necessarily mean that the company is suddenly worse than prior to the announcement. It does, however, bring to the forefront one of the most important aspects of investing: valuation.
In this article, we will to look at four stocks that are currently trading at valuation levels that suggest buying and selling. We are buying McDonald's (MCD), Halliburton (HAL) and Texas Instruments (TXN), while placing a sell order on Netflix (NFLX). Let's look at the case for each one and see if you agree.
Buy McDonald'sWhile the news on Chipotle has damaged the restaurant sector, including names like Starbucks (SBUX), McDonald's should be one of a handful of value alternatives that benefits over the long term. Interestingly, the word "value" comes in to play here not only for the advantages presented by having a "value menu" in tough economic times, but also because, relative to its peers, its stock continues to trade significantly undervalued levels. But that won't last for long. The company will be reporting its second-quarter earnings Monday before the market opens, and earnings per share expectations are $1.38 on approximately $6.95 billion in revenue. As much as I love the stock and the company's management, I would be lying if I said I'm not a little concerned after the Chipotle report, particularly because neither its April nor May comps were very robust, especially the latter due to weaker sales abroad in areas like Germany and Japan. With the stock down ahead of the report due to Chipotle's poor guidance, I would add shares on the possibility of an upside surprise. The reason is simple: Over the past decade, McDonald's has increased annual sales by at least 6%, while more than doubling its operating margins. Even more remarkable is that the company boasts an almost 30% operating margin over the past five years, while its closest competitor comes in at just 14%. This is not likely to change on this report, and I expect the stock to continue its upward trend and top $100 before the end of the year.
Buy HalliburtonIt remains a shock that Halliburton is never mentioned when investors discuss prominent energy companies on the stock market. They always talk about its rivals, Exxon Mobile (XOM) and Schlumberger (SLB). But compared to Schlumberger, Halliburton continues to trade at a significant discount with a price-to-earnings ratio that is 8 points less.
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