An extremely powerful driver of stock prices is expected increases based on better-than-expected company performance. That’s why every month we seek out companies with significant financial backing that are offering amazing upgrades.
Another feature of the upgrade phenomenon is that after a company’s first forecast upgrade, many more positive surprises often follow.
Leading fund manager and behavioral investing expert Fred Stanske recently explained to Citywire Elite Companies how update cycles arise from analysts under-reacting to new developments due to the universal psychological traits of “anchoring” and “overconfidence.” Read more about why this is happening and how it has helped Stanke’s Fuller Thaler Behavioral Small Cap Growth fund deliver 50x returns since its inception in the early 1990s here.
How Citywire Elite Companies Work.
Some of the 24 smart-money stock picks on our recent update screen demonstrate the rinse-and-repeat approach of updates.
We’ve taken a closer look at two of these companies, both of which have been featured on previous update screens this year and have seen their share prices rise by more than 50% over the past month thanks to fresh results that missed forecasts.
All 24 stocks for the update selected on our screen can be found in the table at the end of this article.
Also look out for our article tomorrow on SK Hyniks (KR:000660) is an AI play that trades at just eight times earnings and is the most popular among the world’s best portfolio managers of any stock on our list.
How Data Analysis Works This Week
Our hunt for companies beating broker forecasts begins with selecting the top-fifth and small-cap stocks (market cap below $2.3 billion) from the Citywire Elite Companies database based on their popularity among the elite investors we track. The stock must have a Citywire AA rating at a minimum.
We then look for stocks that have seen their broker consensus earnings per share (EPS) estimates rise significantly over the past month. What counts as “big” depends on the month – this time we’re looking for a 20% or better improvement in forecasts for the next 12 months.
Our data study for companies beating broker forecasts is one of five weekly, simple but powerful studies we conduct on our top-rated stocks to uncover investment ideas.
Our five data dives:
Blue Bird – Yellow Buses Turn Green
Citywire American AAA Rated School Bus Manufacturer Blue bird (US: BLBD) saw its biggest share price gain as it raised its forecasts over the past month. Its stock is up 56% in a month and a staggering 121% since we first highlighted the stock in our January update screen.
The company, a favorite of U.S. small-cap executives, finds itself in an extremely advantageous position. And while the story behind Blue Bird’s impressive performance hasn’t changed much since we first reported it in January, things continue to improve.
Consensus EPS forecasts for the current fiscal year to the end of September have risen by more than four-fifths over the past 12 months, while expectations for fiscal 2025 have risen by more than a third over the same period.
The company benefits from an ongoing restructuring plan and investments aimed at making it a market leader in alternative fuel buses. The push coincides with promises of major federal spending to “green” the U.S. school bus fleet.
Blue Bird’s second-quarter results earlier this month showed the company running at full capacity. In addition to reporting record sales, helped by a 19% rise in average selling prices and an $850 million order backlog, management raised its long-term guidance.
The company now has a long-term goal of $2 billion in annual sales, up from a previous $1.85 billion, and a 14% margin based on earnings before interest, taxes, depreciation and amortization (Ebitda). The new Ebitda margin target compares with the previous target of 13.5% and the current margin of 12%.
Based on what the company called “an abundance of federal funding,” sales are expected to increase 7% annually through 2027.
Blue Bird is becoming a better and faster growing company, and that is the key to greater returns for shareholders. This was reflected in the change in the stock’s rating. However, with growth, forecast earnings at 18 times, and an expected free cash flow yield of nearly 5% over the next 12 months, the valuation doesn’t look that steep just yet.
| Key Facts – Blue Bird Corporation | |||
|---|---|---|---|
| Market capitalization | $1.78 billion | Price | $55.20 |
| Net debt | $58.1 million | Net Debt/Ebitda | 0.8x |
| 52 week high/low | $56.41/$17.59 | Return on invested capital | 27.5% |
| Highest price per profit | 18.4 | First dividend yield | – |
| Fastest EPS Growth | 37.4% | share price for 12 months | 109.9% |
Source: FactSet EPS = earnings per share. Ebitda = earnings before interest, taxes, depreciation and amortization. Forecasts for the next 12 months.
Vital Farms – if Chanel made eggs
AAA rating Vital Farms (USA: VITL) has quickly established itself as the Coco Chanel of eggs.
The company’s shares have soared 67% since they were highlighted on our forecast update screen in early April, and 62% since they were featured in our weekly feature for The Telegraph’s Questor share forecasts column later in the same month.
At first glance, creating a premium brand for a food product like eggs seems like an almost comical business venture. But Vital Farms has proven that it is quite possible. A carton of premium pasture-fed chicken eggs sells for $4.82 more than a regular dozen.
Given the nature of the product, the company has created a surprisingly strong competitive position. This is based on sourcing from a large network of small farms, each of which must meet high ethical standards.
These farms are located in a relatively small area of the United States where conditions are ideal for raising chickens on pasture. To become part of the Vital Farms network, farms will have to make a large initial investment, but will then be assured of good egg prices and support.
All this has created a difficult-to-replicate supply chain that is very different from large-scale farming.
It’s important to note that American consumers love this ethos, and the company does a great job of promoting it – this includes placing codes on the boxes that allow customers to see the farm where the eggs came from.
The company has also built an impressive and rapidly growing distribution network through health food chains such as Whole Foods and brick-and-mortar stores such as Walmart.
In addition to expanding its store base, the company sees big opportunities in foodservice and is investing in new egg processing capacity to keep up with growth.
The success story continued in the company’s first quarter, with management raising its 2024 sales growth forecast to 22% from 17% and expecting underlying EBITDA to increase from $57 million to $70 million.
Investors are looking at the growth story much wiser than they were at the start of the year, with shares trading at 42 times earnings forecast for the next 12 months. Maintaining this rating may require continued performance beyond expectations.
| Key Facts – Vital Farms, Inc. | |||
|---|---|---|---|
| Market capitalization | $1.70 billion | Price | $40.40 |
| Net debt | $94.3 million | Net Debt/Ebitda | – |
| 52 week high/low | $41.94/$10 | Return on invested capital | 17.3% |
| Highest price per profit | 42.2 | First dividend yield | – |
| Fastest EPS Growth | 34.8% | share price for 12 months | 169.7% |
Source: FactSet. EPS = earnings per share. Ebitda = earnings before interest, taxes, depreciation and amortization. Forecasts for the next 12 months.
Smart money stocks beat forecasts
The companies in the table below are ranked by their popularity among the top portfolio managers whose investments Citywire tracks to create our innovative elite company rankings.
Source: FactSet. EPS = earnings per share. Forecasts for the next 12 months.