It can feel overwhelming to figure what stocks to buy (or sell), and for that matter, which ones offer the most upside. But making the right choices is a lot easier when you know where to look for the best information.
Most companies, but not all, host quarterly earnings calls with Wall Street analysts to talk about what happened in the recent quarter and what to expect in the year ahead. The transcripts of these calls are available to everyone. While some companies make them available on their investor relations site, you can also find them from several places online, including The Motley Fool .
Let's look at how an investor could have used these valuable communications to spot timely buying opportunities in shares of Nvidia (NASDAQ: NVDA) , Abercrombie & Fitch (NYSE: ANF) , and Lululemon Athletica (NASDAQ: LULU) .
Case study No. 1: Nvidia
Shares of Nvidia delivered phenomenal returns in recent years supported by growing demand for its graphics processing units (GPUs) used in high-performance computing applications, such as data centers. But as Nvidia approaches record highs this year, it's worth going back to understand the risks, and how reading the company's earnings call transcripts can help you make informed decisions about when to buy the stock.
Nvidia has occasionally fallen victim to weak demand in the chip industry -- the most recent in 2022, which sent the stock down 50% that year.
Investors who bought shares at the end of 2022 would be sitting on a massive gain of 682%. All an investor needed to know was that the long-term growth trajectory for data center infrastructure spending was still in play for Nvidia's business. Earlier that year, Nvidia had estimated its data center opportunity at $300 billion.
Still, Nvidia's earnings call on Nov. 17, 2022, revealed that customer demand for its new Hopper (H100) GPU was in high demand. During that call, CEO Jensen Huang said, "Customers are clamoring to ramp Hopper as quickly as possible, and we are trying to do the same." Of course, this was right around the launch of OpenAI's ChatGPT, which kicked off a massive increase in data center spending for high-powered artificial intelligence (AI) chips.
In January 2023, Nvidia stock traded at an attractive forward P/E of 15.8, which was an incredible bargain. AI chip demand following the launch of OpenAI's ChatGPT turned out to be a major catalyst for Nvidia's data center growth last year, and it could take a few more years for the initial ramp-up in AI infrastructure by data center operators to run its course.
Analysts expect Nvidia to double its full-year revenue this year before another 36% increase next year. The stock is trading at a forward P/E of 30 based on next year's earnings estimates. Assuming those estimates hold up, the stock could hit new highs over the next year.
Case study No. 2: Abercrombie & Fitch
Shares of Abercrombie & Fitch have rocketed nearly 10-fold since bottoming out in 2022. The sluggish performance of brick-and-mortar apparel stores had plagued Abercrombie's sales for years, but CEO Fran Horowitz, who joined the company's board of directors in 2017, engineered an impressive turnaround last year.
In 2022, management outlined a strategy to generate profitable growth. The company was generating very low margins on sales, but its "Always Forward Plan," which management referred to on its earnings calls that year, targeted an operating margin of 8% by fiscal 2025, which implied high earnings growth.
Abercrombie started to show a significant improvement in its April-ending quarter in calendar 2023. The company reported earnings of $0.32, up from a loss in the year-ago quarter. The turnaround was in full swing, and the stock was still cheap.
On the company's May 24, 2023, earnings call, Horowitz said: "This is truly the most powerful brand transformation that I have seen in my career. By listening to our customers and putting them at the center of everything we do, we are delivering product, voice, and experience that are tightly aligned and continue to resonate."
In May of last year, the shares were still trading at just $31 -- representing a very low forward P/E of just 5 times earnings. Investors could have read about the progress the company was making in its May 2023 earnings call and bought the stock before more progress lifted the shares even higher.
Over the last year, the company's earnings have jumped to $8.04. The substantial increase in earnings drove the stock to a recent high of $196.
The stock doesn't offer the same returns from these highs, given that much of the company's margin improvement has been realized. But analysts expect Abercrombie to grow earnings at an annualized rate of 10% over the long term.
Case study No. 3: Lululemon Athletica
Shares of Lululemon haven fallen by half this year over slowing growth that is hitting many retail brands right now. Prior to the sell-off, the stock had advanced 550% from 2017 through the end of 2023.
In 2017, Lululemon was in the process of modernizing its online store with better photography and other improvements. This was a significant catalyst for earnings growth, since Lululemon's direct-to-consumer segment, including online sales, generated a much higher margin than company-operated stores, as noted in the company's annual report .
The improvements Lululemon had made to the online store led to exploding online sales during the holiday quarter in 2017, with e-commerce comparable sales up 42% year over year. This improving growth sent the stock up 54% from the end of August 2017 through March 2018.
During the March 28, 2018, earnings call, CFO Stuart Haselden emphasized it was just getting started. "Our digital business continues to have much lower hanging fruit with additional opportunities in the near-term to [fuel] further conversion increases with website improvements planned this year and check-out search and personalization," Haselden said.
Earnings grew substantially in the years that followed, largely due to the profitable sales growth from the e-commerce business. This drove market-beating returns for shareholders.
Investors who read Lululemon's earnings calls in 2017 and saw the accelerating digital sales growth that followed in the holiday quarter that year could have concluded the company had a great opportunity in e-commerce that could accelerate the company's earnings growth and share price.
It's a tough sales environment for apparel brands right now, but Lululemon still has a global opportunity to expand that is largely untapped. The stock could be a steal at a forward P/E of 18.
Of course, don't take my word for it. However, it's important to listen to management and glean clues. In Lululemon's case, pay attention to what management said about its international momentum in the recent earnings call .
John Ballard has positions in Nvidia. The Motley Fool has positions in and recommends Lululemon Athletica and Nvidia. The Motley Fool has a disclosure policy .
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