One of the greatest strengths of the Robo-Analyst is its ability to scan the entire stock market for the biggest anomalies. Add in the ability to calculate a proven-superior measure of earnings, and I can generate insights that most firms can’t even dream of.
Today, I am featuring the companies that have the Most Understated earnings in the S&P 500. In short, this report gives you one company with:
- The most understated earnings and an attractive-or-worse Stock Rating.
As I put together my macro fundamental research for the 2Q24 earnings period, I see that once again Street earnings are distorted across the S&P 500. These results underscore the more stable nature of Core Earnings.
My firm’s research shows that there are a subset of S&P 500 companies with TTM 2Q24 Street Earnings that are lower than their true profits, i.e. Core Earnings. These companies are more profitable than investors realize and, in many cases, undervalued as well.
There are 121 S&P 500 companies with TTM 2Q24 Street Earnings that are lower than their true profits, i.e. Core Earnings. These companies are more profitable than investors realize and, in many cases, undervalued as well.
Core Earnings research is based on the latest audited financial data, which is the calendar 2Q24 10-Q in most cases. Price data as of 8/15/24. QoQ analysis is based on the change since last quarter.
This report shows:
- the magnitude of understated Street Earnings in the S&P 500,
- that Street Earnings (and GAAP earnings) are flawed, and
- the S&P 500 company with the most understated Street Earnings and a very attractive Stock Rating.
121 S&P 500 Companies Have Understated Street Earnings
For 121 companies in the S&P 500, or 24%, Street Earnings are lower than Core Earnings in the trailing-twelve-months (TTM) ended 2Q24. In the TTM ended 1Q24, Street Earnings were understated for 122 companies.
When Street Earnings are lower than Core Earnings, they are understated by an average of 24% per company, per Figure 1.
Figure 1: Street Earnings Understated by 24% on Average in TTM Through 2Q24
Average understated % is calculated as Street Distortion, which is the difference between Street Earnings and Core Earnings.
The 121 companies with understated Street Earnings represent 33% of the market cap of the S&P 500 as of 8/15/24, which is up from 29% in the TTM as of 5/16/24.
Note that this analysis is based on my team analyzing the financial statements and footnotes for ~3,000 10-Ks and 10-Qs filed with the SEC after earnings season.
Figure 2: Understated Street Earnings as % of Market Cap: 2012 through 8/15/24
For 43 companies, Street Earnings are understated by more than 10% vs. Core Earnings. These 43 companies make up 8% of the market cap of the S&P 500 as of 8/15/24. See Figure 3.
Figure 3: Understated Street Earnings by 10% as % of Market Cap: 2012 through 8/15/24
The Most Understated Earnings in the S&P 500
Figure 4 shows the S&P 500 stock with the most understated Street Earnings (based on Street Distortion as a % of Street Earnings per share) in the TTM ended 2Q24 and a very attractive Stock Rating. “Street Distortion” equals the difference between Core and Street Earnings on a per share basis. Investors relying only on Street Earnings miss the true profitability of these businesses.
Figure 4: S&P 500 Company with Most Understated Street Earnings: TTM 2Q24
*Measured as Street Distortion as a percent of Street EPS
Disclosure: David Trainer, Kyle Guske II, and Hakan Salt receive no compensation to write about any specific stock, style, or theme.