Where did the time go? By the end of this week, Oct. 28, earnings season will have already reached a crescendo (the largest 1,000 U.S. stocks will have already released quarterly results), so the flow of new reports starts to slow down after that. An early read on the current earnings season shows a clear trend: Roughly 69% of companies are delivering profit results that are better than analysts had expected (according to Thomson Reuters). That’s right about in line with the last two quarters.

#-ad_banner-#On an aggregated basis, third-quarter sales are up 10% and profits are up 15%, compared with the same period a year ago. Few would have expected such a decent outcome with all of the headwinds roiling the economy and many industries. Another factor: the solid quarterly results — relative to expectations — are also the result of analysts cutting their forecasts too deeply. As a result, companies only needed to jump over a lower hurdle. And as has been the pattern, forward guidance appears more downbeat, relative to current forecasts.

Still, it’s clear that corporate profits are holding up reasonably well in such a tough economic environment. This bodes well for future results if the economy perks up a bit in 2012. So if many companies are doing well, then which companies are doing really well? Those companies should look like solid candidates for your portfolio, at least on the surface.

I scoured the landscape and came up with a dozen stocks that topped quarterly profits by at least 20%. Here they are…

 
You can quickly spot some clear themes from this group. For example, Bank of America (NYSE: BAC) and Citigroup (NYSE: C) soared past estimates, both trade below book value and both have very low price-to-earnings (P/E) ratios. That’s where the similarities end. Bank of America only exceeded forecasts because of a reversal of previous loan write-downs and a lower-than expected tax rate. Dig deeper into the quarterly results, and you’ll find a still-troubled bank with ongoing legal headaches. Citigroup, on the other hand, is getting healthier, despite my recent mea culpa that an expectation of a big stock rebound was quite premature.


Shares have rallied 20% since that sobering update, and the quarterly upside was delivered through good old-fashioned business improvements and not one-time accounting gimmicks. When the dust finally settles over the troubled banking sector, investors are likely to refocus on tangible book value as a measure of a financial sector stock’s worth. Merrill Lynch pegs that figure at $61 a share for Citigroup — twice the current price. It may take some time to get there, but this still looks to be a very inexpensive stock, and Citigroup may well benefit from the distress — and subsequent retrenchment — from rivals both in the United States and in Europe.

Another theme for many of these “estimate-beaters” is that the strong results may not last. For example:

• Industrial conglomerate Textron (NYSE: TXT) posted solid profit margins thanks to still-strong results at it Bell Helicopter division. But the Textron’s Cessna plane division is struggling for new customers, and quarterly results may weaken in coming quarters.
   
• Knight Capital (NYSE: KCG) strongly benefited from the stock market volatility in July and August, which created wide bid/ask spreads in its market-making business. Volatility dropped in September and the current quarter is unlikely to deliver the same upside surprise.
   
• Cytec Industries (NYSE: CYT), which makes a range of industrial paints and resins, saw robust demand last quarter, but has already seen business slow more recently and is hunkering down for a period of upcoming softness by closing a key plant in Brazil.

The key for “upside surprise” plays is to find companies that can sustain their momentum. I think I’ve found one of them (in addition to Citigroup, noted above).

Noble Energy (NYSE: NBL)
This oil and gas driller showed strength throughout the income statement. Especially productive wells allowed Noble to produce roughly 3% more oil and gas than analysts had anticipated, and the costs to dig new wells also came in lower than expected. The current quarter should be equally impressive as new wells could come online a quarter before many analysts had expected. “It’s rare that you have the combination of production, development and exploration all peaking at the same time for one company,” note analysts at Sterne Agee, who carry a $107 price target on the stock.

Noble has built an impressive slate of development projects, from Israel to West Africa to U.S.-based shale plays and the Gulf of Mexico. The recent quarterly results are part of an ongoing trend: Management tends take a very conservative stance to costs and development schedules and then typically comes in ahead of plan. That’s why the company has topped the consensus earnings estimate by at least $0.12 a share in each of the last three quarters and will probably keep doing so as new energy projects start to come online later this quarter. Analysts at Citigroup figure a steady jump in cash flow per share, from $1.47 a share in 2011 to $16.50 a share in 2012 and $18.87 a share in 2013 puts fair value on the stock at $110 — almost 25% above current levels. And that upside comes with still-depressed natural gas price forecasts.

Risks to Consider:  A still-weak economy should lead you to closely scrutinize recent results as well as the assumptions built into forecasts for future quarters. It’s best to avoid assuming costs can be cut much more, so future “estimate-topping” results will likely only come from company-specific growth drivers or a strengthening economy.

Action to Take –> Even with the banking and natural-gas sector experiencing challenging environments, Citigroup and Noble Energy still managed to deliver solid numbers. Citigroup brings significant potential upside along with ample risk, while Noble offers decent upside with likely limited risk.