The landscape of the stock market appears to be entering a new phase in the second half of 2023, with numerous companies on the brink of transitioning from losses to profits. The reasons behind this shift could be attributed to the conclusion of the Covid-19 pandemic or individual businesses reaching crucial turning points.
Investors seeking favorable trades may find success by focusing on these transforming entities. Equity strategists from Jefferies have discovered that Russell 3000 companies which have managed to flip from negative earnings per share to positive earnings per share have outperformed the index by an average of more than 5 percentage points since 1996.
Investors are now demanding tangible returns before plunging into investments, hence the trend of “show me the money.”
Identifying Potential Winners
A thorough screening of the S&P 500 has resulted in the identification of 18 companies that have reported negative earnings per share in the past two years, but are expected to exhibit positive per-share profits this year and next.
These potential winners owe their forecasted profit upturn to the conclusion of the Covid-19 pandemic and the subsequent resurgence in spending on in-person travel and entertainment. Among the notable companies are airlines such as American Airlines Group (AAL) and United Airlines Holdings (UAL), cruise lines Norwegian Cruise Line Holdings (NCLH) and Royal Caribbean Cruises (RCL), and casino operators Caesars Entertainment (CZR), Las Vegas Sands (LVS), and Wynn Resorts (WYNN). Other prominent names on this list include travel-booking site Expedia Group (EXPE) and ticket marketplace Live Nation Entertainment (LYV).
Given their association with the pandemic-recovery trade, it comes as no surprise that all these companies have surpassed market performance in 2023, with Royal Caribbean leading the pack with a year-to-date surge of 105%.
Companies on the Rise
In a mix of ups and downs, several companies are poised to turn the page on their recent struggles. Despite the challenges faced by aircraft giant Boeing (BA), analysts anticipate a positive shift in the coming years. After experiencing losses in 2021 and 2022, it is predicted that Boeing will see a rise in GAAP earnings per share, reaching $7.42 by 2024. Although currently trading slightly behind the S&P 500, the company’s shares remain significantly lower than their early 2019 highs.
Another company expected to leave a period of misfortune behind is PG&E (PCG), a California utility. With a history of unprofitability since 2017, largely due to penalties and costly infrastructure upgrades, PG&E is determined to rebound. While lagging behind the S&P 500 this year, the company stands out as one of the top performers among utility stocks listed in the index.
The oil-and-gas sector also makes an appearance on the list, with three companies meeting the criteria. Baker Hughes (BKR), EQT (EQT), and Targa Resources (TRGP) have all shown potential for improvement. Additionally, Axon Enterprise (AXON), Ceridian HCM Holding (CDAY), Palo Alto Networks (PANW), and Viatris (VTRS) complete the lineup of promising companies.
However, it is crucial to look beyond earnings alone and consider free cash flow. By applying a similar requirement for positive FCF, the list narrows down to four companies. These companies have reported negative EPS and FCF in recent years but are projected to transition into positive territory in the near future. PG&E, Las Vegas Sands, Wynn Resorts, and Royal Caribbean Cruises fall into this category.
Another notable inclusion would have been Uber Technologies (UBER), had it been part of the S&P 500. While it didn’t meet the screen criteria, analysts anticipate Uber’s profitability and free cash flow to increase significantly. This optimistic outlook raises the possibility of Uber joining the index at the same time as its earnings undergo a positive shift. Despite currently trading at around the same level as its 2019 initial public offering price, Uber shares have shown considerable growth this year, up by 79%.
In summary, these companies symbolize a new chapter for themselves, where overcoming challenges and embracing positive growth lie ahead.
