During the course of the recently completed reporting season, I nominated four stocks which exceeded consensus market forecasts. The S&P/ASX 200 (ASX: XJO) returned 1.9% over the average 15 trading days in these stocks from the day prior to profit releases up until 7 March 2014, while the four stocks yielded an average return of 12.25%.
The four stocks — Vocation (ASX: VET), Cover-More Group Ltd (ASX: CVO), Downer EDI (ASX: DOW), and Stockland Corporation Ltd (ASX: SGP) — saw share price rises of 26.8%, 8.6%, 8.6 % and 5.0%, respectively. Again, this was for the period from the day prior to the profit releases to 7 March, 2014.
Let's look a little closer at these four stocks.
1. Vocation
Vocation is a newly listed company that provides vocational education and training. The recent interim profit report showed revenue in the first half exceeding company guidance in the prospectus. Accordingly, the company is widely expected to upgrade earnings guidance in the near term.
Student enrolments are the largest driver of future earnings and they were strong across the group. Another positive is the well performing Solutions Business Channel, which provides access to annuity style income going forward.
2. Cover-More Group Ltd
After easily exceeding prospectus forecasts across most measures, Cover-More is set for double-digit compound annual growth in earnings. Prior to listing at $2.00, the company had an enviable track record of growing earnings at an average 27% per annum since 2008.
Cover-More is Australia's leading travel insurance and medical assistance provider with a strong brand and multi-channel distribution. Flight Centre (ASX: FLT) is its largest distribution partner. It also has an expanding presence in Malaysia, China and India.
The company offers rare exposure to the fast growing outbound-leisure travel market.
3. Downer EDI
Widespread growth, cost reductions, cash flow generation and a strong balance sheet combined to produce a result above consensus forecasts for this engineering services company. Diversification was the key, with strength in some divisions offsetting weakness in others. Contract mining margins surprised on the upside on better cost management, while Infrastructure Australia was weaker than expected.
Downer is seen as a standout from peers Boart Longyear (ASX: BLY) and Leighton Holdings (ASX: LEI). The stock is considered cheap and some growth prospects should emerge from the upcoming bidding opportunities, which include the Sydney light rail contract.
4. Stockland Corporation Ltd
Stockland produced a result that was in line with consensus market forecasts. However, sometimes management commentary on the day of the profit release may impact forecasts for subsequent years. This in turn results in upgrades to future earnings and an efficient market should factor this into the share price over time.
Clear evidence of a recovery in operating profit margins for residential, retirement living and a resilient retail portfolio prompted speculation that Stockland has now entered an upgrade cycle. This is an extremely positive outcome after two years of negative earnings revisions.
Foolish takeaway
In my opinion, all four of these stocks would sit comfortably in a medium-to-long-term portfolio.
Results that outpace market consensus forecasts typically lead to a re-rating of those share prices to higher levels. Furthermore, quality stocks tend to have a series of upgrades over time. For example Downer EDI rallied 32% in the two months after the previous profit reporting season.
