With the bond market reaching all-time highs (lower yields), the time has come for a bit of a reality check with respect to stocks.
Thus far, the stock market has behaved rather reasonably. We saw major gains in the first quarter followed by profit-taking. While painful, the correction takes some of the froth from equity prices.
This action comes on the heels of a similar pattern in 2011. The common thread between the two years is corporate profit growth. While stocks tread water, earnings have been relatively strong.
In other words, valuations as defined by multiples of profits have come down over the last two years. It makes for a compelling case to own stocks at this current moment in time until one takes a closer look at the bond market.
Bond traders are telling us that the world is once again on the precipice. How can we reconcile the two fairly diametrically opposed views?
Stock traders have a right to be nervous. The last time we saw this sort of divergence was in 2008. The bond market was right with its view then and stocks ultimately lost some 40% of their value before the 2008 year was out.
This is no 2008. Yes, problems with debt in eurozone countries is disconcerting, but keep in mind that one of the biggest triggers for stocks to collapse were asset prices that had reached unsustainable levels. The resulting loss in asset value is what led to stocks losing so much in 2008.
Different this time around
In my humble opinion, this go-around is different as evidenced by the staying power of corporate profits and the lack of any sort of real bubble (unless you count gold, which is a whole different story). As such, I simply do not see any real predictable trigger for a market collapse.
I think stocks ultimately hang in there, making for fertile ground for trading stocks releasing earnings. Last week’s Stone-Cold Earnings Trade Lock of the Week, Kroger, was a 100%-plus winner. Every single week those playing the earnings game can find similar winners.
Forget about the macro nonsense and long-term gyrations of your portfolio. Make money playing the earnings trading game.
This week’s Stone-Cold Earnings Trade Lock of the Week is a potential grand slam. Shares of this company have been beaten down so badly irrespective of earnings performance a sharp reversal is long overdue. The company is expected to grow profits at a double-digit clip and yet shares trade for a single-digit multiple of expected earnings.
It may be the slow period of earnings, but there are still plenty of stocks to look at. Here are five companies to look at, including this week’s Stone-Cold Earnings Trade Lock of the Week:
This software company reports results for the quarter ending May 31, 2012 on June 19 after the market closes. Wall Street expects Adobe (NASDAQ:ADBE) to report a profit of 59 cents per share in the period. That estimate is a penny per share lower than 90 days prior.
Adobe matched estimates in the last reporting period with three beats before that. Shares of Adobe are up a slight 6% in the last year. Analysts expect profit growth of 10% from the current fiscal year ending Aug. 31, 2012 to the next. At current prices, shares trade for 13 times current fiscal year estimated earnings.
2) Jabil Circuits
The semiconductor company reports results for the quarter ending May 31, 2012 on June 19 after the market closes. Wall Street has profits pegged at 64 cents per share in the quarter. That estimate is a penny per share lower than 90 days prior. Jabil Circuits (NASDAQ:JBL) has matched estimates in the last two quarters beating the number twice before that. Shares of Jabil Circuits are up 4% in the last year of trading. Analysts are looking for profits to grow by 15% from the current fiscal year ending Aug. 30, 2012 to the next. At current prices, shares trade for seven times current fiscal year estimated earnings.
Stone-Cold Earnings Trade Lock of the Week: Buy the July expiration calls shortly before the market closes on June 19.