Another day and another astonishing lesson when it comes to earnings.
Yesterday, we talked about consumer stocks and I explained why my biggest profit makers of the last five years have come from these types of stocks.
I also explained how, at first, I took a lot of grief for recommending these types of stocks when the global consumer was “dead.”
I proved the naysayers wrong and I’m going to do it again by talking about my least favorite sector. One that is plagued by fuzzy accounting, doublespeak and just plain bad business practices. The catch here is that some of these stocks have been trending higher lately and the folks who like to discredit my methods and recommendations are starting to point a finger.
So I’ll settle this once and for all in today’s Market 360. We’re going to take this sector head on and see what’s driving stock prices and if there are any stocks worth owning for this earnings season.
For three days in a row we’ve seen financial stock after financial stock bite it when it comes to earnings.
First, on Tuesday, Goldman Sachs (NYSE:GS) reported mixed operating results for the first quarter. Compared with the same quarter last year, net sales dipped 16% to $9.95 billion. Over the same period, net earnings declined 23% to $2.11 billion.
Now, the company’s earnings of $3.92 per share did beat the $3.55 consensus estimate by 10%, but that still isn’t enough to get me excited about this company. The fact remains that this company is quite weak in terms of return on equity as well as operating margin and gross margin. And, buying pressure for this stock remains at rock bottom. That’s why even after posting a 10% earnings surprise, the stock continued to gap down after the earnings announcement. This is an F-rated stock, so I strongly recommend that you keep it out of your portfolio.
Then, before the opening bell on Wednesday, Bank of New York Mellon (NYSE:BK) announced similarly lackluster first-quarter earnings results. Net income declined 1% to $619 million, or 52 cents per share. Earnings per share fell in line with the consensus estimate.
Meanwhile total sales remained unchanged at $3.65 billion; this slightly topped analyst estimates of $3.59 billion in sales. The only reason thatBK is staying somewhat afloat is that it has upped its fees, and so the company is still fundamentally weak. This company is still struggling in terms of sales and earnings growth and its return on equity is mediocre. Investors recognize this, so shares of BK have been steadily losing ground in the past month.
Finally, we have Morgan Stanley (NYSE:MS), reported earnings before the opening bell today. Investors seemed to like the report and bid the shares higher throughout the day. That’s encouraging for shareholders, but let’s look at the actual numbers.
Last year at this time the company posted net income of $964 million or 50 cents per share. This quarter, a loss of $78 million or (6) cents per share. Adjusted net income came in at 77 cents per share which peat estimates of 45 cents per share, but the company failed to beat revenue estimates. Morgan Stanley is very weak in terms of earnings growth, sales growth as well as return on equity, and I’m not optimistic that today’s gains for shares are any sign that this company will provide shareholders with long-term gains. This is a D-rated stock, which means that if you have shares of MS, I recommend that you find a good time to let them go.
This is just a small sampling of financial stocks that you should avoid this earnings season–and probably every earnings season for the next year.
Don’t get caught up in the short-term rallies these stocks are known for. If you don’t perfectly time your exit, you’ll be left holding the bag.