Earnings season has started.
Stocks that have beat consensus estimates have risen, while those that have underperformed estimates have fallen.
Unless you have some sort of inside information, it’s practically impossible to guess whether a certain stock will outperform or underperform estimates.
That’s not a game we can win – so it’s not a game we want to play.
But after their post-earnings moves, a company’s stock may be too expensive – or too cheap.
Both situations create opportunities – and that’s a game we can play.
That’s why in today’s stock pick, I’ll be highlighting a stock that has already reported second-quarter earnings…
Earnings which resulted in the stock dropping – to a level where I think it’s now undervalued.
Basically, I think the stock is now too cheap, and there’s an opportunity here we can exploit.
Telefonaktiebolaget LM Ericsson (publ) (ERIC)
Swedish telco company Ericsson reported its second-quarter earnings nearly two weeks ago on July 13 – and its stock immediately tumbled by over 12%. It has recovered slightly since then, but not by much.
The reason for the tumble was the company announcing a surprise loss thanks to weak demand combined with shrinking profit margins. On top of this surprise loss, it also provided a downbeat outlook for Q3, although it did mention it expects business to pick up strongly from Q4 onward.
However, it appears that this expected pickup and return to profitability from Q4 onward doesn’t seem to have been factored into Ericsson’s current price.
Mobile network spending tends to be cyclical, and Ericsson’s weak results coincided with the downturn in the cycle. As things swing around again, this lends credence to management’s expectations of a strong recovery.
But as I said, that recovery does not appear to have been priced in yet – creating an opportunity. Morningstar has placed a fair value on Ericsson’s stock at about $9, implying a nearly 80% upside for patient investors.
To your wealth,
Felix @ Ace of Investing