As we enter the second half of 2023, a notable shift is occurring in the broader stock market. Whether attributed to the post-pandemic era or individual businesses reaching key milestones, several companies are on the brink of turning losses into profits.
Identifying these potential winners can prove lucrative for investors, as highlighted by equity strategists from Jefferies. Their analysis reveals that Russell 3000 companies that transitioned from negative earnings per share to positive earnings per share outperformed the index by an average of over 5 percentage points in the year following this shift since 1996.
Investors are now eagerly demanding proof of profitability before making their moves in the market.
S&P 500 Screen Results: 18 Companies Poised for Positive Performance
After conducting an extensive screening process across the S&P 500, we have identified 18 companies that have reported negative earnings per share over the past two years but are expected to showcase positive per-share profits this year and the next, according to analysts.
The catalyst for many of these companies lies in the aftermath of the Covid-19 pandemic. With the revival of in-person travel and entertainment, they are experiencing a significant inflection point towards profitability. Among the notable names in this group are American Airlines Group (AAL) and United Airlines Holdings (UAL) from the airline sector, Norwegian Cruise Line Holdings (NCLH) and Royal Caribbean Cruises (RCL) from the cruise industry, and Caesars Entertainment (CZR), Las Vegas Sands (LVS), and Wynn Resorts (WYNN) from the casino segment. Additionally, travel-booking site Expedia Group (EXPE) and ticket marketplace Live Nation Entertainment (LYV) join this list, making up half of the identified companies.
The prospect of a pandemic-recovery trade is no secret to investors, as all of these companies have already outperformed the market in 2023, with some achieving remarkable gains. For instance, Royal Caribbean has seen a surge of 105% year-to-date, far surpassing market expectations.
In summary, the stock market landscape is undergoing a transformation, with numerous companies on the verge of realizing profitability. By capitalizing on these opportunities, investors can position themselves for potential success.
Reversal of Fortune: Companies Poised for a Turnaround
In a diverse mix of companies, nine stand out as potential candidates for a reversal of fortune. One notable contender is the aerospace giant, Boeing (BA). Having faced setbacks like the 737 MAX crises and the COVID-19 pandemic, Boeing has struggled to report a full-year, unadjusted profit per share since 2018. However, industry analysts estimate a potential upturn, with projected GAAP earnings per share of $1.58 this year and $7.42 in 2024. Despite a decline of over 50% from their previous highs in early 2019, Boeing shares have performed relatively well compared to the S&P 500 this year.
Another company on the list is PG&E (PCG), a Californian utility. Since 2017, PG&E has faced financial challenges, unable to turn a profit on a GAAP basis due to penalties related to a tragic wildfire incident and costly infrastructure upgrades. Although PG&E lags behind the S&P 500 this year, it ranks among the top-performing utility stocks within the index.
The oil-and-gas sector also presents three contenders: Baker Hughes (BKR), EQT (EQT), and Targa Resources (TRGP). Completing the list of potential turnarounds are Axon Enterprise (AXON), Ceridian HCM Holding (CDAY), Palo Alto Networks (PANW), and Viatris (VTRS).
However, financial success cannot be solely attributed to earnings on the income statement. The key determinant lies in free cash flow. By incorporating this criterion into our analysis, only four companies meet the requirements. These companies, previously reporting negative earnings per share and free cash flow for the past two years, are forecasted by analysts to reverse their fortunes and achieve positive results this year and next. The selected companies are PG&E, Las Vegas Sands, Wynn Resorts, and Royal Caribbean Cruises.
One intriguing inclusion on the list is Uber Technologies (UBER). While it did not meet the criteria due to its exclusion from the S&P 500, industry analysts expect Uber to achieve profitability this year, accompanied by a surge in free cash flow. This progress could position Uber as a potential candidate for the index, coinciding with the company’s earnings inflection. Although Uber shares have experienced a 79% increase year-to-date, they remain relatively stable compared to their initial public offering price in 2019.