When the ball dropped in Times Square and everyone welcomed in the New Year, investors and analysts had high hopes for corporate earnings during the first quarter of 2016. However, as we made our way through January, into February and finally March, those hopes shrank.
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As you can see in the adjacent earnings consensus trend chart, while expectations for all of the sectors were down, energy took the biggest hit in expectations.
Analysts estimated the sector’s earnings would be 60% lower than they were during Q1 2015.
Unfortunately, there have been a few companies that have underperformed their underwhelming expectations. Here’s a list of the bottom 10 performers — those with the worst negative earnings surprises — in the S&P 500 so far:
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As our SlingShot Trader subscribers can tell you, this is just the type of dramatic situation we love to trade.
We’re going to look at five of these stocks and see if they have a chance of bouncing back and recovering from their disappointing performance.
Earnings Duds: Alphabet Inc (GOOG, GOOGL)
Click to Enlarge Alphabet Inc (GOOG, GOOGL) missed earnings expectations by 5.8% when it reported on April 21. Paid clicks grew by 29% year over year, but the cost per click dropped 9%.
For GOOGL investors, who have grown accustomed to strong ad-sales growth, this was a bit of a shock … and a few other key players in this space have disappointed, too (which opened the door for an opportunistic bearish play here at SlingShot Trader).
In the aftermath, traders sent GOOGL stock lower — and a bearish diamond reversal pattern was completed in the process. Since that time, the stock has been sliding lower, but it is approaching some key support levels. If the stock doesn’t hold at $700, it has a good chance of holding at the down-trending support level at ~$680.
GOOGL is too strong a player in the online and mobile advertising space to stay down for long. Sure, it might not continue rising as rapidly as it did during 2015, but it certainly has the capacity to bounce back from these lows and continue trading between $700-$800.
Earnings Duds: Travelers Companies Inc (TRV)
Click to Enlarge Travelers Companies Inc (TRV) is a major player in the property & casualty insurance space, which makes it a stock we like to monitor at SlingShot Trader due to its sensitivity to rate-hike chatter.
On April 21, TRV missed earnings expectations by 8.7%. Higher catastrophe losses — thanks to heavy storms in Texas in late March — hit the company’s bottom line hard.
However, these types of one-off catastrophe losses are hard to gauge moving forward. Looking at the company as a whole, TRV saw its net written premiums grow by 5% year over year, with overall revenue of nearly $6.7 billion.
With the company continuing to buy back its stock (it still has billions left in its buyback kitty) and the stock approaching a strong up-trending support level, we think TRV has a great opportunity to bounce back.
Earnings Duds: Philip Morris International Inc. (PM)
Click to Enlarge Philip Morris International Inc. (PM) missed earnings expectations by 11.6% when it reported on April 19.
It seems that currency fluctuations took a toll on international revenue that the company repatriated to the United States (a trend that made our SlingShot Trader subscribers some serious money a few weeks ago).
While this pulled the stock back down a bit, it certainly didn’t knock it out of its current uptrend. The company’s solid 2016 guidance of 10%-12% EPS growth prevented traders from selling too heavily.
PM seems to have found solid support at $96, and we anticipate that demand for stable stocks that pay strong dividends (PM has a dividend yield of 4.29%) will keep investors coming back to the stock throughout 2016.
Earnings Duds: Dover Corp (DOV)
Click to Enlarge Dover Corp (DOV) missed earnings expectations by 12.3% when it reported on April 21. Continued weakness in the energy sector hit DOV’s operations.
Energy revenues dropped by 34% as oil and gas exploration companies pulled back on operation and expansion expenditures.
Interestingly, with oil prices starting to climb again, many analysts are looking for North American oil and gas producers to start bringing wells back online once oil starts climbing above $50 per barrel.
This would not only be good news for energy lenders — a bullish scenario we were discussing in SlingShot Trader just the other day — but, more to the point, it could lead to increased revenues for companies such as DOV, which provide services to energy companies.
DOV dropped down and re-tested support at ~$65 after its earnings announcement, and this level has held since that time. If oil prices continue to rise, watch for DOV to continue the up-trend it started back in January.
Earnings Duds: Comerica Incorporated (CMA)
Click to Enlarge Comerica Incorporated (CMA) missed earnings expectations by a whopping 24.3% when it reported on April 19.
The stock soared higher, however, eventually breaking through the long-term down-trending resistance level that had been plaguing it for the past year.
We’ve included this example to show that even though a company may miss earnings expectations, it doesn’t mean the stock is going to sell off…even in the short term, like we have seen with the other four examples we’ve explored.
Most of the time, what has happened in the past — the revenue and earnings a company produced during the previous quarter, for instance — is less important than what investors expect to happen in the future.
CMA took a hit to earnings, as it had to move more money into its loan loss reserves to protect it against possible oil and gas loan defaults. But, with oil prices rising, the chances of those defaults actually occurring has gone down.
Of course, the company’s recent 4.8% dividend increase and talk of potentially restructuring or selling the bank have also been helpful in lifting the stock. We expect the bullish trend to continue.
InvestorPlace advisors John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next trade and get 1 free month today by clicking here.
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