Stocks Are Struggling After Reporting Earnings. These 5 Could Soar

The most recent corporate earnings report hasn't given markets a boost, but it is still feasible to uncover equities that can rise in reaction to profit announcements. One method is to hunt for undervalued stocks where Wall Street is becoming more optimistic about earnings.

It's not that incomes have been poor. According to Credit Suisse statistics, aggregate first-quarter profits per share for S&P 500 businesses that have disclosed their results so far were 8.7 percent higher than projected as of Monday morning.

However, according to Wells Fargo data, the average move in those equities the day after the results lagged the S&P 500 by 0.19 percentage points. Companies do not appear to be rewarded for exceeding expectations. This is due in part to the fact that equities are already pricey.

The S&P 500 is now selling at little less than 19 times the aggregate per-share profits projected for index companies in the coming year. That appears to be excessive, considering that bond rates have recently risen, lowering the discounted present worth of future earnings.

Trust strategists recently downgraded equities in reaction to increased rates. Morgan Stanley analysts are assuming a multiple of 18 times projected earnings in determining their target level for the S&P 500, signaling that they anticipate valuations to fall.

When stocks are expensive, they already reflect a significant stream of future profits, so firms must outperform earnings estimates by an even greater margin to drive their stocks upward. That hasn't happened on a consistent basis so far in this profit-reporting season.

The stocks to own ahead of earnings releases are those that have been battered down particularly hard, even while profit expectations have climbed.

Evercore strategists compiled a list of stocks that have lost significantly more than the S&P 500's nearly 8% year-to-date dip, with rises in profit estimates far greater than the 2 percent gain in aggregate EPS analysts predict.

The firms on the list may be ripe for gains following earnings because, while Wall Street has penciled in high profits, their stocks are down, so their prices may not reflect the full stream of profits ahead.