One of the big themes in the run-up to Q3 earnings season has been the market’s resilience in the face of a deteriorating corporate profit backdrop. This resilience has been considered a function of the fact that expectations are so bad that results just have to be better.
Moreover, there is a lot of optimism that the housing recovery will eventually work its way into the economy, as homebuying has definitely picked up, and that should mean lots of trips to Home Depot (NYSE:HD), furniture stores, lawn care dealers and the like.
This makes a lot of sense as mortgage rates are now down 3.36%, which is a record low, and refinancing activity is picking up as dramatically as it did in 2009. ISI Group analysts observe that refinancing activity puts money directly in homeowners’ pockets, which they tend to spend quickly — and this was a huge help to the growth-scare recoveries in 2009, 2010 and 2011, and ought to do the same now.
However, there is the little problem of timing, as stocks are reporting last quarter’s earnings, and so far they are not too pretty.
The excellent firm Edwards Lifesciences (NYSE:EW) was clobbered by 21% Tuesday after it announced QE revenue would come in at $448 million, below prior guidance of $465 million to $485 million. Executives blamed Europe. Keep in mind this is not just any company, but one that has regularly beat estimates and raised guidance.
Click to Enlarge Tech also was very weak after another couple of personal computer related companies pre-announced earnings shortfalls.
It’s amazing how much Dell (NASDAQ:DELL), for one, has struggled. I realize Dell has missed every important trend in technology the past few years, including mobile, tablets and social networking. That’s fine, I get that. But it still has a solid PC and storage business, and by calculations of a quantitative value estimating system that I respect, the thrashing it has endured has pushed it more than 80% under fair value.
Dell probably is worth $50 or more to a private buyer because of its cash flow and cash hoard, and yet it has been pushed down under $10!
At this moment, investors are too busy punishing Dell to give it credit for its good deeds. But eventually the tide will turn again, and shares should rise back at least toward the $20 area. No way to say exactly when that will happen, but I would not be surprised to see the $9.50 to $10 area turn out to be a multiyear low for the company.
I am not ready to recommend it right now, but put it on your radar for a trade in case the positive sentiment genie emerges from his lamp in coming days or weeks.
Jon Markman operates the investment firm Markman Capital Insight. He also writes a daily swing trading newsletter, Trader’s Advantage.