As we begin to look past Hurricane Sandy, earnings return to the fore — oh, right, it’s still earnings season! Convention wisdom is that this reporting period has been a dismal one for stocks, and investors want to know how they should fold this set of corporate earnings into their investment thesis. Our expert advisers weigh in — and offer specific ideas for further research.
Terrible Revenues, Terrible Earnings … and There’s More Coming
By John Jagerson and Wade Hansen
Editors, SlingShot Trader
This earnings season we knew we were going to have to keep an eye on top-line revenues — especially for those companies doing a lot of business overseas. They were terrible last quarter, and they had a high likelihood of being terrible this quarter. The only saving grace last quarter was the ability to squeeze better margins out of worse-than-expected revenues to generate better-than-expected earnings and the expectation of QE3.
Well, this quarter, there’s no new QE to hope for, and companies continue to report disappointing top-line revenues with equally disappointing bottom-line earnings. Plus, companies have been downgrading their outlook for the future.
So let’s put all of that together:
- companies continue to struggle to generate growth in top-line earnings;
- management teams seem to have hit their limit in how far they can cut costs and improve margins to generate decent bottom-line earnings out of lackluster revenues;
- the outlook for the near-term future is grim with China, Europe and economies around the world slowing down; and
- nobody is expecting the Fed to do anything new — on top of the $85 billion that it is injecting into the system each month, that is — anytime soon.
The Q3 earnings season has been a bust, and it doesn’t look like Q4 is shaping up to be much better. Unless the U.S. Congress is able to avoid the Fiscal Cliff and management teams start raising their outlook for the future, we could be in for some rough times ahead.
Go With Best-in-Class Stocks
I won’t sugarcoat it — we are in the middle of the worst corporate earnings season in almost four years. In particular, big multinational players have been hit hard by slowing economic growth in Asia, Latin America and Europe. And the weaker U.S. dollar doesn’t do much to help bottom lines either. So nearly 90% of these multinational companies are lowering their fourth-quarter guidance.
Understandably, the stock market is nervous: We’re in the middle of what I like to call the “Dow Washing Machine.” But while the indices sometimes feel like they’re stuck in a spin cycle, there are still profit opportunities to be made in this market. In this low-interest-rate environment — there’s nowhere to go that yields higher than stocks — investors are transferring their money to the fundamentally strongest stocks. This is why I’m urging my readers to stick with those companies with only the best earnings prospects right now.
I expect that this choppiness will settle down after earnings season. Analysts expect much stronger sales and earnings for the fourth quarter. And the holidays tend to make consumers and investors alike more optimistic, which should fuel increased spending on Main Street and higher trading volumes on Wall Street. Finally, once we figure out who will be in the Oval Office come Jan. 21, that’ll remove some of the uncertainty that has been plaguing the markets.
So while this earnings season has hit some big names hard, I’m still bullish for the rest of 2012.
Ugly Earnings Are the Rule, Not the Exception
By Jeff Reeves
Editor, InvestorPlace.com and The Slant
The general earnings picture is pretty darn ugly. And it’s not just the Q3 slowdown with big misses from Google (NASDAQ:GOOG) and Apple (NASDAQ:AAPL), either. It’s forward-looking problems such as lower guidance at big-name stocks.
Oh yeah, and beyond balance sheet issues there’s a European slowdown, the fiscal cliff fight, emerging markets like China and Brazil cooling off and a host of other macro issues at play. All of this is sapping investor optimism as well as holding back business spending.
The bright spot (if there is one) is that the old platitude about it being a “stockpicker’s market” still holds. Generator manufacturer Generac (NYSE:GNRC) just popped almost 20% thanks to blowout results and a tie-in to Hurricane Sandy. And social media dud Facebook (NASDAQ:FB) got some swagger back on mobile ad optimism. These picks show there is indeed opportunity for a small group of stocks based on very specific drivers.
But these are the exceptions, not the rule. Simply meeting expectations is fine when the market is moving up … but if the market is soft, simply going with the flow is a decidedly unattractive trait. The best stocks are ones that prove they are different, not just companies that can step over a low bar.
My advice: Be more selective than ever, because you don’t want to be stuck with an also-ran if the market heads south. You want a stock that is better than that, and holds firm despite any short-term volatility.
The Bulls Will Come Back
By Bryan Perry
In just the past seven trading sessions, the S&P 500 has shed 3.8%, primarily due to high-profile earnings misses that caught Wall Street off-guard. The market chose to turn a blind eye to the profit picture and focus instead on QE3. That resulted in late-September gains that have all but evaporated.
It’s important to go through the numbers, though, because the market has been discounting a tide of uncertainty and softer earnings while ignoring signs of optimism. In fact, several blue-chip companies have posted solid Q3 financials and a bullish outlook. Some of those companies include: Accenture (NYSE:ACN), Travelers (NYSE:TRV), Proctor & Gamble (NYSE:PG), Verizon (NYSE:VZ), JPMorgan (NYSE:JPM), Home Depot (NYSE:HD), YUM! Brands (NYSE:YUM), McKesson (NYSE:MCK), Costco (NASDAQ:COST), JB Hunt Transportation (NASDAQ:JBHT), Citigroup (NYSE:C) and Johnson & Johnson (NYSE:JNJ). In fact, as of last week, 62% of companies that had reported earnings beat analysts’ expectations, according to S&P. That’s right in line with the 10-year average.
I provide this lengthy list of names because many of these companies are cyclical in nature and thus more economically sensitive. These blue-chips all have very constructive technical charts and will likely be the market’s leaders in the next rally.
So against a negative investment landscape with uncertain outcomes for the elections and the fiscal cliff, there are points of daylight that will become the source of bullish sentiment once some of the present concerns pass. To sum it up, the downside risk looks limited if Congress acts swiftly to curtail sequestration and extend tax cuts until mid-2013.
Not as Bad as It Could Be
By John Markman
If we look back over the past three weeks of the market, the S&P 500 is down from the 1460 level that we hit the week of Sept. 15, and from the 1470 level that we hit in the first week of October, and from the 1475 level that we hit the day of the QE3 announcement. So we had a series of lower highs, and now we’ve experienced a set of lower lows. Typically that’s a pretty good indication that the market is turning down.
But is it really? We’re kind of on the edge. I’ll tell you why.
Although we do have lower highs and lower lows, right now the market is exactly where it was at the beginning of September — and in fact, it’s in the same place we were in the last two and a half weeks of August. If you think about that, it’s actually quite positive because October has featured some horrendous earnings reports from many large companies: Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Caterpillar (NYSE:CAT) and many more have reported earnings and revenues that were much lower than anticipated for the third quarter. And forward guidance has been terrible. Yet stocks are right where they were at the beginning of September? You would think stocks would be much lower, perhaps even 10% lower.
So what do we make of this? Investors are clearly disappointed with the results from the past quarter, but they’re trying to look through the trough that lies ahead in the fourth quarter — and toward a first quarter or first half of next year that could be a little brighter. So on that basis, exposure to the long side of the market continues to be prudent.
It’s Dicey Out There — Focus on Blue-Chips and Energy
By Richard Band
Third-quarter earnings season still has several more weeks to run, but the major trend is already apparent. Growth has slowed dramatically, for both sales and profits, over the past year. Yet the S&P 500 has climbed 12% year to date.
This is a dicey situation. The Federal Reserve’s money pumping seems to be having less and less of a stimulative effect on the real economy. If corporate profits fall in 2013, today’s stock prices will look to have been too high by perhaps 15%-25%.
One potential positive surprise: Next week’s election results could give us enough of a realignment in Washington to push the federal government a few steps closer toward tackling its long-term fiscal woes. A break in the fiscal logjam would lift business and investor confidence. The stock market would likely resume its climb, despite the cloudy earnings outlook.
Balancing the pluses and minuses, I recommend a cautious approach to stock-picking right now. Concentrate most of your new money on world-class franchises that have demonstrated the ability to prosper even in a slow economy, such as Coca-Cola (NYSE: KO) and McDonald’s (NYSE: MCD).
I’m also nibbling at a few energy stocks; I believe the dip in oil prices since mid-September has largely run its course. My favorite name at the moment is Occidental Petroleum (NYSE: OXY). It yields 2.7%, with plenty of cash flow to support another fat dividend hike soon. Buy below $90.