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With Q1 earnings season underway, we’ve taken a look at a few underbought stocks, which might outperform on earnings day. The two stocks which got us most excited are Novo Nordisk (NYSE:NVO) and Toyota Motor Corporation (NYSE:TM). Both companies had ammunition, which will see a stronger Q1 earnings report, both have been somewhat underbought, and both have value to run with, according to Wall Street analysts.

Novo Nordisk

Novo Nordisk A/S is a healthcare company, engages in the research, development, manufacture, and marketing of pharmaceutical products worldwide. The company operates through two segments, namely diabetes and obesity care, and biopharma.

The stock has seen an increase in its RSI (Relative Strength Index) from below 30 to above 50 within the last month, which is a strong indicator of momentum. In addition to the RSI , the reputable equity research firm Zacks Equity Research rates the stock as an A for momentum. According to Seeking Alpha, quantitative analysts worldwide have lashed out A+ profitability ratings within the past month.

What can be expected in their May 5th earnings release:

• Receivables are outstanding of $5282.6 million, and with a Cash Conversion Cycle of 271.6 days we may well see a whole lot of unrecognize revenue appear on the income statement.

• $5977.4 million of depreciation was expensed in 2020. When looking at the balance sheet, the company has historically expensed depreciation sporadically. 2021’s net income will be much higher considering no depreciation expenses.


• A deferred tax asset of $962.7 million is present. If the company chooses to make use of the tax asset, fewer taxes will be paid, and net income would potentially beat estimates.

Novo Nordisk has a wall street price target of $80 and looks set to improve on 2020’s Q4 release, where they beat revenue estimates by $35.94 million and EPS by $0.01. Out of the last 8 earnings surprises, the company has beaten estimates 6 times and underperformed twice.



Toyota


Toyota Motor Corporation designs, manufactures, assembles, and sells passenger vehicles, minivans and commercial vehicles, and related parts and accessories. Toyota is a well-diversified auto company, and their EV quest is well underway, which might well see the company reap further market share.

What can be expected in the May 12th earnings:

Toyota has beaten all of its previous 8 earnings expectations. Analysts expect this to be the case again, and we’ve picked up on a few factors which could add substance to the argument.

• The company had a deferred tax asset of $3343.8 million at the end of 2020, and if Toyota had to reverse the asset, the consequence would be an increase in net income.

• Accounts increased by 26% in 2020, with the cash conversion cycle remaining the same as in 2019 (27 days). As a result, uncollected revenue might be recognized while payables don’t outweigh the potential benefits of receivables.

• The company teamed up with Subaru and Mitsubishi in 2019, and synergies have lead to constant cost-cutting and favorable financing terms. 2021 Q1 could’ve seen decreased financing costs and a higher net income.

Wall Street has placed a price target of $176.04 on the stock, which might well be reached soon if the company beats its earnings again. Toyota’s RSI (Relative Strength Index) traded below 30 during 2020 and has now reversed back up to 50’s territory. With Zacks Equity Research still rating the stock as an A for value, the stock will most likely remain underbought until it reaches an RSI score of 70.

Investors Takeaway

There’s plenty of value in the market for investors, and value stocks are still generally underbought due to the growth to value stock rotation not being fully complete. Both Novo Nordisk and Toyota have accounting line items, which may drive earnings reports upwards. With a history of beating estimates, investors can’t go wrong by investing in any of the two stocks, if not both.
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