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Picking the Pleasant Surprises

By Numer de Guia The third quarter is shaping up as yet another disappointing period for corporate earnings. The last week has brought a steady stream of warnings that profits will come in below the Street's forecasts.

There are some outfits, however, that have exceeded expectations, and those are the focus of this week's Stock Screen.

We started out with a bit of "home cooking," drawing from the list of issues boasting Standard & Poor's investment rankings of 4 STARS (accumulate) or 5 STARS (buy), meaning that S&P analysts expect them to outperform the broader market over the next 6 months to 12 months.

WIDELY COVERED. Then we looked for positive signals from the rest of the investment community. We wanted to make sure the stocks were widely followed, so we searched for those covered by at least 10 investment banking (sell-side) equity research analysts, according to data compiled by research firm I/B/E/S.

Next, we screened for companies that have posted positive-earnings surprises in the most recent quarter. Their actual quarterly earnings per share (EPS) beat average estimates in both absolute terms, topping the analysts' consensus estimate (based on I/B/E/S data) by at least 10%, and in relative terms, coming in at least three standard deviations from the mean. (That's a statistical measure indicating a very high probability that the EPS surprise did not happen by chance.)

Finally, we looked for signs that analysts believe the good earnings performance could continue for the rest of the fiscal year. Each of the stocks on the list had to have had more analysts increase their earnings projections than lower them in the past month.

These 15 names emerged:

Apollo Group (APOL)

Belo Corp. (BLC)

Career Education (CECO)

Electronic Arts (ERTS)

Forest Laboratories (FRX)

FPL Group (FPL)

HCA Inc. (HCA)

KB Home (KBH)

Lennar Corp. (LEN)

Lowes Cos. (LOW)

Noble Energy (NBL)

Pacific Sunwear (PSUN)

Penney (J.C.) (JCP)

Smurfit-Stone Container (SSCC)

Tribune Co. (TRB) De Guia is a portfolio services analyst for Standard & Poor's

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