a tale of two stocks

Wednesday was a big day for my fund. Earnings season is upon us and two of our largest longs reported quarterly results. I expected both companies to smash analysts’ estimates. Sure enough, that’s exactly what happened. You’d think I’d be celebrating big gains in both stocks, but unfortunately, you’d only be half right.

Too bad this isn’t baseball. Batting .500 will get you into the Hall of Fame in that sport. In my game, though, it generally won’t get you too far.

First the good news: Phoenix-based Grand Canyon College (ticker: LOPE) reported it earned 62 cents per share in the third quarter versus estimates of 54 cents.  LOPE’s revenues were $175 million vs. estimates of $169 million. The company also upped its full year guidance for earnings and revenues to $2.33 and $686M vs. estimates of $2.23 and $675M.  Best of all, the timing of LOPE’s announcement was perfect. I gave a presentation on Grand Canyon to the Ira Sohn Conference in San Francisco on Wednesday and its results made me look pretty damn smart. Thanks guys!

Not surprisingly, Grand Canyon’s stock is up sharply since its announcement. It briefly touched $50 early in the session Wednesday and is at 47.50 as I write this, well over ten percent higher for the week. Pass the champagne, right? If only, which brings me to the not-so-good news.

The beleaguered Dallas-based railcar and barge manufacturer Trinity Industries (TRN)–once one of my favorite stocks–handily beat consensus estimates, too. The company earned 90 cents a share versus Wall Street estimates of 85 cents. Revenues were $1.56 billion versus $1.5 billion estimates. That’s a great quarter, and it marks four straight convincing quarterly beats for the company. You’d think TRN would be climbing just as high as LOPE, especially since it’s dropped so precipitously in recent weeks. But there was a catch. Trinity guided full year 2014 earnings per share to a range of $4.08 to $4.16 vs. Wall Street estimates of $4.15.  This hints at a possible slight earnings disappointment in the fourth quarter. TRN sank nine percent on the news. The stock is up slightly since Wednesday, but over the last month as the company has faced a major lawsuit and falling oil prices, it’s share price has been crushed.

So, what am I going to do with these win-some-lose-some results?  The first answer is simple.  I’m going to buy more LOPE. But Scott, you might say, the stock is close to its 52-week high. Are you sure you want to buy more at that price? To which I would respond: ABSOLUTELY! If you show me a company trading at 52-week highs and consistently beating quarterly estimates, I will always consider buying. Too often, investors dismiss those kinds of stocks as “expensive.” That is a fallacy. Companies that beat estimates quarter after quarter and justifiably rise higher are not always overvalued–they’re often undervalued. Grand Canyon is definitely an example of this phenomenon. As I said in my presentation at the conference on Wednesday, Grand Canyon’s stock has been hampered by the slump in the wider for-profit education industry, but I believe it has a good chance to grow into one of the largest and most profitable university systems in the country.

As for Trinity, I’m going to spend some serious time analyzing its numbers and the transcripts of its conference call. With the recent lawsuit going against it and the price of oil continuing to fall, I’m worried that Trinity might be starting a stretch of merely matching, not beating, earnings and revenue estimates. A lot of people would consider buying more stock in a clearly strong company like Trinity during so-called “dips” like it has been experiencing lately. I strongly advise against this. After almost three decades of managing other people’s money, I have learned that the best strategy is to add to companies that beat and rarely, if ever, to add to stocks with earnings that only match or under-perform Street estimates.  I still think both Trinity and Grand Canyon are great long term secular stories, but yesterday’s news implies that LOPE will likely be a better stock in the coming months.


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