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3 Late-Season Earnings Plays for Mid-Cap Traders

MarketBeat - Wed May 31, 2023

Mid cap stocks to buy

As June rolls around, amusement parks and beachside cabanas are getting worked into the budgets of vacation-hungry Americans. For U.S. stock traders, summer’s kickoff coincides with the conclusion of second-quarter earnings season and some last minute swing trade ideas.  

In the mid-cap space, corporate earnings have been extraordinarily balanced. Over the last 30 days, the number of positive and negative earnings surprises have been almost identical among domestic mid-caps. 

Last week, clothing retailer Urban Outfitters and cosmetics specialist E.L.F. Beauty delivered big earnings beats. Telecom service provider IHS Holding and asset manager Stepstone missed badly. Significant stock swings occurred in all four cases. 

The unusually even number of positive and negative surprises have afforded traders ample opportunities to make money on both sides. It will likely be more of the same over the next couple of weeks with all eyes on these three mid-cap reports. 

Will Ciena Crush Earnings Expectations Again? 

Ciena Corp. (NYSE: CIEN) is scheduled to report before the market opens on June 6th. Wall Street will be looking for 15% year-over-year revenue growth and 22% earnings per share (EPS) growth. The optical networking leader is must-see TV because it has delivered two huge earnings beats the last two times out. In both cases, the stock moved sharply higher in heavy volume. 

Ciena shares have since trended lower, however, and given up all of their 2023 gains. But volume has been relatively light on the way down and traders have been buying the dip in recent days. After rallying 7% last week, momentum is building ahead of the report.

In recent periods, the company has benefitted from an industry shift to optical switches and Ethernet solutions. Even as 5G investments have slowed, telecom carriers and cloud data centers have been ramping their spending on Ciena products. Along with improving supply chain issues, this drove a 78% positive EPS surprise in Q1.

Yet the market seems to have forgotten about these tailwinds and the fact that management significantly hiked its full-year revenue guidance. This ‘optical’ illusion looks like another bullish opportunity.

When Does Thor Industries Report Q2 Results?

Thor Industries, Inc. (NYSE: THO) also reports pre-market on June 6th. This will be an intriguing one as well because last quarter’s miss ended the RV maker’s multi-year streak of positive earnings surprises. Escalating costs and ongoing supply chain snags have weighed on the business in recent quarters. Making matters worse, U.S. and European consumers have been holding off on purchasing motorized and towable RVs due to higher prices and interest rates.

When Thor Industries reports fiscal Q3 results, the bar will be set surprisingly high. Although analysts are projecting a second straight 39% revenue decline, they are also forecasting a sequential improvement in profits. The $1.10 consensus EPS target implies that earnings will more than double from the previous quarter. But have cost inflation, supply chain issues and demand really improved that much? 

Thor Industries is still the global leader in RVs and still has good long-term growth prospects owing to post-pandemic interest in cross-country explorations. But considering management’s lowered fiscal 2023 guidance and slow adoption of the company’s electric RV, financial performances may be underwhelming for at least another quarter.

Are KB Home’s Q2 Earnings Expectations Too Low?

KB Home (NYSE: KBH) is one of the last mid-caps to report, with Q2 results slated for June 21st. Last time out, the homebuilder delivered better-than-expected EPS, and the stock gapped up in good volume. This month’s report will be another good indication of the company’s ability to manage a housing market slowed by surging mortgage rates. 

Since KB Home targets mostly low-to-middle-income Americans and first-time homebuyers, its customer base has been particularly sensitive to macroeconomic conditions. Following last quarter’s beat, CEO Jeffrey Mezger pointed to two noteworthy trends: 1) homebuyer demand started to pick up at the tail end of Q1, which marks the start of the key spring selling season, and 2) prices are being lowered and other concessions are being offered in several KB Home communities. Combined with a sharp sequential decline in the Q1 cancellation rate (68% to 36%), these comments suggest a demand recovery is underway.

The Street’s forecasts for Q2 year-over-year revenue growth and EPS growth are -19% and -44%, respectively. Given the recent tailwinds and Q1 beat, these seem overly pessimistic. And considering the average rate on a 30-year fixed mortgage cooled off during the quarter, constructing a bullish earnings trade may again be a moneymaker.  

The article "3 Late-Season Earnings Plays for Mid-Cap Traders" first appeared on MarketBeat.

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