By Barry Randall Every quarter the Crabtree Technology portfolio runs a quantitative screen to look for stocks to invest in. Many stocks that make the cut and find a place in the portfolio are companies that “beat and raise” when announcing their quarterly financial performance What does beat-and-raise mean to us? It means the company beat earnings and/or revenue expectations as published by the equity analysts who cover it…and then raised its own forward guidance.
Beat and raise definedThey might also have issued guidance for the first time that is above current consensus estimates, causing analysts to likely raise their estimates. But in plain English, "beat-and-raise" means: The past was better than expected and the future is going to be even better than previously expected. Experience helps when interpreting earnings announcements. Sometimes a company doesn't have any Wall Street analyst coverage. How can they beat analyst estimates that don't exist? Well, sometimes public companies without coverage will issue their own expectations for the next quarter while reporting the quarter just completed. If the company issues an earnings announcement that includes a thoughtful analysis of its business and credible estimates for the subsequent quarter…and then beats those estimates, you can fairly consider that to be an earnings 'beat.' Of course, I require the company to possess several important attributes before I will invest, but I categorically admire companies that bootstrap their financial progress this way. Just as in real life, we admire people who make a plan and set a goal, then meet or exceed that goal. For companies that show a pattern of success, real Wall Street analyst coverage will often follow. And sometimes a beat-and-raise quarter isn't quite so positive. Suppose a company has previously announced that it expects to earn $0.25/share in its third quarter and $1.00/share for the full year. After the third quarter ends, it announces it earned $0.35/share (a 'beat') and is raising its full year guidance to $1.05/share (a 'raise').
But wait a minute - why wouldn't full year guidance be raised at least by the excess $0.10 'beat' in the third quarter? Does that imply that the fourth quarter expectations are now lower than before? Clearly more information is needed.
A trio of top performers During the June quarter 'earnings season' that concluded in August, we had several earnings announcements from Crabtree holdings that were undeniably positive. Here are three companies that reported solid beat-and-raise quarters that we subsequently kept through our recent portfolio rebalance: Super Micro Computer (SMCI)
- June quarter estimates: earnings per share of $0.39 on $396.0 million in revenue
- June quarter actual: $0.40 on $428.1 million
- September quarter estimates: $0.35 on $377.9 million
- September quarter guidance: EPS in a range from $0.36 to $0.42 per share on revenue in a range from $395 – $435 million
- June quarter estimates: earnings per share of $0.57 on $371.0 million in revenue
- June quarter actual: $0.58 on $395.5 million
- September quarter estimates: $0.68 on $409.6 million
- September quarter guidance: $0.73
- June quarter estimates: earnings per share of $0.58 on $376.9 million in revenue
- June quarter actual: $0.64 on $376.0 million
- Full year 2014 (December) estimates : $2.37 on $1.51 billion
- Full year 2014 guidance: EPS in a range from $2.62 to $2.68 per share (raised from $2.30 – $2.40) on revenue in a range from $1.49 – $1.53 billion (narrowed from $1.48 – $1.54 billion)
Portfolio performanceAugust was solid for the Crabtree Technology portfolio. The portfolio rose 4.9% in the month, better than the 4.8% and 3.8% gains in our Russell 2000 (RUT) and S&P 500 (SPX) benchmarks, respectively. Our internal benchmark, the Merrill Lynch Technology 100 (MLO) rose 4.4% in August. The most widely held technology ETF, the State Street Global Advisors' Technology Select SPDR (XLK) rose 3.3% during the month. Photo Credit: Evan Atwood, Flickr: Creative Commons DISCLAIMER: The investments discussed are held in client accounts as of August 31, 2014. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.
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