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As the second-quarter earnings season wraps up, a few conclusions can be made. First, it was ugly. Three-quarters of companies in the S&P/TSX composite index have reported so far. More than half of them missed the Street's sales forecasts, and about half missed the consensus earnings estimates as well.

Furthermore, over all, there was no growth in both sales and earnings. On average, sales declined over 16 per cent and earnings 22 per cent.

But in terms of investment returns, there were some winners. So what companies were the high-flying stocks of this dismal reporting season?

Listed in the table are 13 Canadian-listed stocks delivered double-digit gains on the trading day following the release of their quarterly financial results. A higher proportion of these were resource stocks, many of which were beaten-down and oversold and had delivered horrendous year-to-date returns. However, while the strong rallies immediately after the release of their earnings reports were impressive, the sustainability of the positive momentum is questionable for many of these stocks.

Let's take a brief look at a few of these high flyers.

Calfrac Well Services Ltd. reported results that were weak, but not as weak as expected thanks to effective cost controls by management. Results were not as bad as feared, which is what drove the stock price higher. For now, I don't think you should be buying shares. The fundamentals are terrible. Revenue declined 36 per cent year-over-year as commodity prices collapsed and capital spending by oil companies declined. In the words of management, "equipment utilization and pricing in the oil-field services industry will continue to be adversely affected for the remainder of the year and likely into 2016." Many analysts' earnings estimates for 2015 and 2016 were revised lower. I believe it is still premature to be bottom-fishing for undervalued energy stocks.

Open Text Corp. delivered exceptional results, with revenue and earnings ahead of prior management guidance and the consensus estimates. The company reported earnings of 87 cents a share (U.S.), beating the consensus earnings estimate of 69 cents a share. The company's sales team closed an impressive 26 deals valued at over $1-million each. Management raised its outlook for operating margins, forecasting margins to be in the 30 per cent to 34 per cent range for fiscal 2016, up from its targeted range of 28 per cent to 32 per cent for fiscal 2015.

However, there is one big, black cloud overshadowing the stellar results – a tax review by the U.S. Internal Revenue Service for fiscal 2010 through fiscal 2012. This could result in a sizable tax charge for Open Text. This tax uncertainty may create an overhang that limits multiple expansion as well as upside potential for the stock price, until the matter is resolved.

Now for Shopify Inc., a software company with a leading cloud-based commerce platform designed for small and mid-sized businesses. Its software allows merchants to sell their products across multiple sales channels, such as the Web, social media and within physical stores, and allows merchants to monitor data such as inventories, payments and orders.

The company reported impressive growth in the second quarter, the first time Shopify has reported earnings, as the company was just listed on the New York Stock Exchange and Toronto Stock Exchange in May. While Shopify is an Ottawa-based company, 69 per cent of the company's 2014 revenue was from the United States, with just 7 per cent from Canada. The company reported revenue of $44.9-million, up 90 per cent year-over-year, and ahead of the consensus estimate of $38.1-million. In addition, management's outlook was solid. For the third quarter, management anticipated revenues to expand to between $47-million to $48-million, and for 2015, it anticipates revenues in the $181-million to $183-million range, which would be up between 72 per cent and 74 per cent from the prior year. In 2014, revenues rose 109 per cent to $105-million from $50-million.

While Shopify is a company with a strong growth profile, my hesitation is the stock's valuation. The stock has appreciated significantly since its initial public offering price of $17, and is trading at a premium enterprise-value-to-sales multiple relative to its peers. Investors may be able to take advantage of the market volatility and potentially purchase shares on a pullback, in the low-$40 range.

The bottom line

It's important to look through the headline numbers and analyze industry and company fundamentals behind the reported results to see if rallies after earnings reports are justified. For some stocks, these rallies can be indicative of solid fundamentals. For others, these rallies may have represented selling opportunities rather than buying opportunities.

Jennifer Dowty, CFA, Globe Investor's in-house equities analyst, writes exclusively for our subscribers at Inside the Market. E-mail any stock suggestions that you want profiled to jdowty@globeandmail.com

High Flying Stocks

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