Most investors inconsistently view quarterly earnings as a catalyst for stock prices upon the news release. They often find themselves trapped in the volatility of sudden moves and face the risk of large—or total, in the case of options—losses if the direction of the stock after the announcement goes the wrong way.
There is a way to somewhat accurately predict where a stock could go after earnings announcements or to see where broader markets are betting these stocks could go on the event. Keeping the saying “it must be expensive for a reason” in mind can be useful for investors in these scenarios, likewise for cheapness. Here are three stocks becoming ‘expensive’ before they report earnings this month and why markets are willing to pay.
Aerospace and defense stock Lockheed Martin Co. (NYSE: LMT), wireless and communications provider T-Mobile US Inc. (NASDAQ: TMUS), and even technology stock CoStar Group Inc. (NASDAQ: CSGP) are some of the stocks reporting their subsequent quarrel earnings this month, and they all share the common factor of commanding valuation premiums compared to their peers. This is why markets might be willing to overpay for these stocks ahead of their announcements.
Lockheed Martin Positioned for Strong Quarter as Middle East Conflicts Drive Rising Arms Demand
As conflicts in the Middle East arise and escalate, the United States and its military allies will have to call upon domestic arms manufacturers like Lockheed Martin to help control and handle these situations accordingly, creating new demand for contracts in the company.
Investors can see this trend taking on momentum through a government contract database, spotting a new inflow of up to $599 million worth of government contracts going to Lockheed Martin to prepare responses against these conflicts, something markets are starting to bet on as the possibility of optimistic guidance and maybe even an earnings beat.
Knowing that a strong quarter is likely, markets are now willing to pay up to 21.5x the price-to-book (P/B) ratio, which is a significant premium over the rest of the aerospace sector’s average valuation of 5.6x today. The optimism doesn’t stop there for Lockheed Martin stock, though; others on Wall Street share the same bullish view.
Analysts at Citigroup decided to reiterate their “Buy” rating for the stock as recently as October 2024, this time seeing a price valuation of up to $700 a share. To prove these new views right, Lockheed Martin would need to rally by as much as 14.4% from where it trades today, not to mention a new 52-week high price for the company.
Lastly, investors can see signs of bearish capitulation in the face of all this bullish sentiment and evidence, as Lockheed Martin stock’s short interest declined by as much as 18.8% over the past month alone, leaving room for new bulls to come in before the earnings are out.
T-Mobile Stock Gains New Premium as Subscription Business Strengthens
During times of higher inflation, such as today, and especially during economic uncertainty, businesses with subscription-based models tend to do well, considering their predictability and stability in cash flows and profits. Compared to peers like AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ), T-Mobile stands apart in strategy.
Competitors fell behind in investing heavily in fiber communications, which not only eat up a lot of cash but also pose significant weather risk, some of the issues that T-Mobile’s fixed wireless model does not have to endure. Fixed wireless is less capital-intensive and safer, and that superior quality keeps the company a leadership state compared to peers.
This is also why markets are willing to overpay for T-Mobile stock ahead of its earnings announcement. Compared to the rest of the communications industry’s average P/B ratio of 1.4x today, T-Mobile stock commands a premium of 3.9x today. Knowing that the business’ investments are superior to peers and that is drawing more business, markets are rightfully bullish before earnings.
Analysts at Benchmark have recently boosted their price targets for T-Mobile stock as well, this time shooting for $250 a share, which calls for up to 16% upside from where T-Mobile stock trades today.
Double-Digit Upside Ahead for CoStar Group Stock
Combining the power of data and technology to the real estate sector is CoStar's value proposition for investors, one Wall Street is surely bullish on before the company's next earnings announcement. Starting with analysts, here's what they say about the company's future.
Those at Needham & Co. see CoStar Group stock trading as high as $107 a share, calling for a net upside of 38.4% from today's stock price, not to mention a new 52-week high. Knowing that the industry is in dire need of data to aid in decision-making during shifting interest rates, markets bet that the stock is going to deliver a strong quarter.
Looking into valuations, CoStar Group stock trades at 145.9x price-to-earnings (P/E) ratio today, compared to the rest of the business services industry's average 43.0x average P/E today. Another premium to consider ahead of earnings is to be justified by potential financial outperformance.
To close the loop on this view, investors can note CoStar Group stock's falling short interest, which declined by 4.6% during the past month alone. This shows investors another sign of bullishness through bearish capitulation in the stock recently.
