Large cap earnings trade ideas for risk-seeking investors

Key Points

• TransDigm has flown past consensus EPS estimates for six straight quarters and is closing in on the $1,000 level.
• For Petrobras, lower commodity prices and production that weighed on both upstream and downstream results in Q2 should flip to higher prices and production for Q3.
• Copart stock is up 60% over the last 12 months and an annualized 30% over the last five years.

Just as it seemed investors were spooked by rising interest rates and geopolitical crises, Halloween week turned out to be the best week of 2023. A nearly 6% surge in the S&P 500 erased all of October’s losses thanks to cooler than expected economic data that has many thinking the Federal Reserve’s rate hike campaign is over. This week’s commentary from Fed speakers could go a long way in telling investors whether they are in for a holiday letdown…or a Santa Claus rally.

A secondary driver of November’s market direction is the ongoing third quarter earnings season. Over 80% of S&P 500 companies have already reported and the results have been unusually good. According to Factset, both positive earnings surprises and the magnitude of surprises are above historical norms. Some 82% of S&P companies have beat Wall Street earnings per share (EPS) estimates and the average beat among all companies is 7.1%. 

This not only means that the index is on pace for its best consensus-topping performance in two years but also that traders are seeing opportunities aplenty to benefit from bullish earnings bets. Often when a company announces strong earnings, its stock price runs higher, creating a chance for ‘in-and-out’ and options traders to bank quick gains. Even better if this happens during a market uptrend because upbeat investor sentiment can extend an earnings rally. Insulet, Paramount Global and Constellation are a few examples of companies that crushed Q3 earnings estimates and are up 10%, 20% or more over the past week.

Good news for traders — there may be more where that came from. Third quarter earnings season may have reached its peak, but there are still nearly 100 S&P 500 companies yet to report and many more U.S. and international large caps. These are three stocks that could very well keep the party going.

What isTransDigm expected to report for Q3? 

When TransDigm Group Incorporated NYSE: TDG reports Q3 (fiscal Q4) earnings before the opening bell Thursday, the Street will be anticipating more stellar profit growth. The aircraft parts supplier generated 53%, 55% and 49% EPS growth, respectively, in the first three quarters of its fiscal year amid a recovery in air traffic and increased U.S. military spending. A boom in leisure and business travel has translated to greater demand from plane manufacturers and a greater need for aftermarket parts. Meanwhile, the Biden Administration’s proposed $842 billion Pentagon funding has the leading defense supplier positioned to benefit from a second tailwind.

Analysts are expecting ‘only’ 37% year-over-year profit growth this time around but this is 1) still impressive growth off a $5.50 EPS base from a year ago and 2) likely to be surpassed given TransDigm’s earnings track record. The company has flown past consensus EPS estimates for six straight quarters. Over this span, the stock is up 57% — and closing in on the $1,000 level.   

When does Petrobras report third-quarter results?

Petróleo Brasileiro S.A. NYSE: PBR is scheduled to announce third-quarter financials on Friday morning. The Brazilian oil and gas producer is coming off a disappointing second-quarter performance that included matching 7% top and bottom line misses. But what hurt results last time is likely to help the Q3 numbers. 

Lower commodity prices and production that weighed on both upstream and downstream results in Q2 should flip to higher prices and production for Q3. Brent crude oil prices rose 17% during the reporting period and enjoyed a couple a weeks in the low $90’s. If Petrobras was able to rein in operating expenses to capitalize on the pricing environment, Wall Street’s $0.77 EPS estimate could look silly — and give additional fuel to a stock that has run 44% year-to-date.   

Will Copart deliver a positive earnings surprise?

Copart, Inc. NASDAQ: CPRT is usually not a volatile earnings mover, but the stock’s recent 2-for-1 split sets it up for greater percentage gain potential. Now trading in the mid $40’s, the online car auction specialist reports fiscal 2024 first-quarter results after the market close on December 14th. More often than not, management underpromises and overdelivers, which is why the stock is up 60% over the last 12 months and an annualized 30% over the last five years. 

Copart’s 40% share of the auto auction market has afforded it major scale advantages in terms of being able to expand into new geographies and build bigger auction facilities. The company extends this competitive edge by investing in digital capabilities that improve buyer access and pickup times. With auto loan rates sky-high, interest in used vehicle auctions has taken off in the last few years and has Copart on track to reach $4 billion in sales next year. As far as the next quarterly report goes, look for bullish traders to have the winning bid.