This profit reporting season hasn’t kicked into high gear yet, but the market has already thrown up some winners that investors will find hard to ignore.
Stocks that deliver a nice earnings surprise will jump on the day of their results but history has shown that their share prices continue to drift upwards for several weeks, so it isn’t too late to be jumping onto these opportunities.
From that perspective, there are three stocks that stand out. The first is wagering group Tabcorp Holdings Limited (ASX: TAH).
The company posted a 72% rise in revenue to $3.8 billion and a 46% uplift in underlying earnings before interest, tax, depreciation and amortisation (EBITDA) to $736.4 million for FY18.
Morgan Stanley is impressed as the results showed that its merger with Tatts Group is going to plan and it reiterated its “overweight” recommendation and $5.20 price target on the stock.
“The recent result showed execution of synergy targets, regulatory changes, Powerball game changes and the migration to online position TAH for solid growth,” said the broker.
“Our analyst team believes that as the market attributes the proper value to the lotteries business and looks for defensive earnings growth, TAH will re-rate.”
The second stock that has impressed is baby products retailer Baby Bunting Group Ltd (ASX: BBN). The stock has surged 44% to $2.50 on the back of last week’s profit announcement even though it showed an 18.9% drop in EBITDA to $18.6 million.
What got the market excited was its FY19 outlook with gross margin expected to surge by over a third and as same-store sales jumped 9.8% as at August 5 thanks to the collapse of its main rival Toys “R” Us.
The stock may not look like a bargain anymore, but I think it will continue to run for a while yet as the re-rating of the once struggling retailer is likely to push Baby Bunting towards $3.
The third stock that has defied sceptics is online property website operator REA Group Limited (ASX: REA). I was worried that its FY19 outlook wouldn’t support its lofty price-earnings (P/E) valuation given the falling property market, but the company has managed to convince the market that is can sustain its circa 20% profit growth this year.
While listings have fallen, property developers are upping their advertising spend to combat the slowdown.
As long as our property market doesn’t suffer a hard landing, REA looks well placed to keep delivering.
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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has recommended REA Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.