When speculation runs into facts, sparks can fly. Speculators have pushed stocks lower on fears of a double-dip recession and a global financial crisis triggered by a default in Greece. But the hard numbers from Federal Express (NYSE: FDX) earnings recently tell a different story.
In the midst of all the worry, investors received a dose of good news this week from Federal Express earnings. FDX reported results that beat expectations. In addition FedEx provided very strong guidance for the future showing no signs of weakness from a weak economy or higher inflation.
For those interested in making money during forthcoming earnings season, the news at FedEx is extremely bullish for stocks in any number of sectors.
In particular look for airline stocks like Delta (NYSE: DAL) and American Airlines (NYSE: AMR). Those stocks have been depressed on worries about oil prices eating profits – something that clearly did not impact Federal Express.
What about the steel industry? Stocks in the group have been pushed lower thanks to worries about a double-dip recession impacting demand. Schnitzer Steel (NASDAQ:SCHN), U.S. Steel (NYSE:X) and AK Steel (NYSE:AKS) are three names that are lower, but are likely to surprise the market with strong results.
Even better for market participants was FedEx’s mid-range guidance for annual profits was $6.60 per share was higher than Wall Street consensus estimates.
As for Federal Express, the overnight shipping company is an important cog in the global economy. Its results not only provide an indication on the health of business around the world, but being a shipping company reliant on fuel will tell us about the possible effects of rising crude prices.
FedEx CEO acknowledged these issues in telling analysts, “There’s no question we went through a brief soft patch”. Despite the challenges the company posted a profit of $1.75 per share, three cents per share better than consensus estimates of $1.72 per share.
I cannot overemphasize how important this news from Federal Express is in terms of setting the tone heading towards earnings season. Values in the market are ultimately determined by discounting future profits. When presented with actual results, prices will tend to firm.
If operating results are strong within a market that is weak, stocks will naturally adjust upwards. It is very difficult to remain bearish on speculation when the facts simply do not support the argument. Even if the downtrend is temporary, the market will get a boost if results are better than expected.
In the previous quarter both Delta Airlines and AK Steel reported results that beat analyst estimates. Immediately after Delta reported strong results shares moved 10% higher. In subsequent days buying continued, and in less than a week Delta had gained 20%. Today, shares are trading for half that gain as the fear trade returned.
AK Steel had a similar experience. It beat estimates by reporting a profit of 8 cents per share when the market was expecting a loss of a penny per share. The stock jumped nearly 6% after the report. Where do shares trade today? Investors have kindly rewarded AK Steel with a 10% discount to where shares were trading prior to strong earnings results.
Historically when sentiment is this poor, the contrarian view wins out. As we head to earnings season, traders interested in making a quick buck can trade on this fear based and inefficient pricing. When actual results hit the moves can be powerful.
Federal Express shares were up nicely after its report and held gains the following day – a day when stocks were very weak.
As of this writing, Jaime Dlugosch did not own a position in any of the stocks named here.
