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Coach & Netflix: Why Traders Need a Steady Trigger Finger

One-time losers are now bounding past the Street's expectations


One bad quarter doesn’t necessarily make a trend.

Just look at Coach (NYSE:COH).

The high-end handbag retailer shocked the market Tuesday with some stupendous Street-beating results. Coach clobbered analysts’ average earnings and revenue estimates in a way that seemed unthinkable just three months ago.

Back in January, some seriously crummy second-quarter results had us asking if Coach had become a first-class ticket to nowhere. The company suffered a stunning stall-out in growth, especially in the U.S. Profits, revenues and same-store sales all missed Wall Street’s estimates — during the all-important holiday selling season.

It was ugly.

But boy, was that epitaph premature. In the most recent quarter, Coach posted better-than-expected bottom- and top-line growth, helped by solid gains in North America and a huge 40% sales spike in China.

By the way, that’s the same China that’s weighing on the global economy — especially emerging markets — as its own growth slows dramatically.

In other words, despite a sluggish or even recessionary global economy, it appears that Coach has hardly lost its cache, especially with international shoppers.

Coach serves as a useful reminder that we shouldn’t be too quick to stick a fork in companies just because of an earnings miss. (Nor should we get too high on them because of a beat.)

Consider Netflix (NASDAQ:NFLX). Shares exploded higher Tuesday after the company swung to a quarterly profit from a year-ago loss. It exceeded analysts’ expectations for earnings, revenue and subscriptions.

True, Netflix has a long history of beating profit estimates, but it outdid itself this quarter. Earnings per share grew sequentially from 13 to 31 cents, beating the Street’s expectations by 12 cents.

Not bad for a stock that much of the market was betting would fall. Nearly 14% of Netflix’s float was sold short as of the end of March. (A short squeeze was no doubt responsible for the outsized rally on earnings.)

DuPont (NYSE:DD) is another example of a stock shocking the Street with an abrupt change of fortunes. This component of the Dow Jones Industrial Average blew earnings big time back in the fall quarter, missing estimates by 14 cents per share.

Shares lost more than 7% in the aftermath of disappointing third-quarter earnings. But two consecutive quarters of Street-beating results have sent the stock on a tear. Indeed, shares are up 23% since hitting a 52-week low back in November.

Of course, it’s still early in the earnings reporting season, but the trend for the broader market isn’t as bad as some of the biggest headlines would suggest.

Despite some nasty disappointments from Dow components like IBM (NYSE:IBM) and Caterpillar (NYSE:CAT), as well as technology bellwether Oracle (NASDAQ:ORCL), the usual high percentage of companies are still beating estimates.

More than a fifth of  S&P 500 companies have reported earnings so far, and 72% have beaten Street profit estimates, according to data from FactSet. Furthermore, the blended growth rate for the S&P 500 is currently positive, with earnings increasing by 0.1%.

That’s pretty weak, of course, but it’s a heck of a lot better than the 0.7% decline Wall Street was forecasting heading into reporting season.

Most importantly, analysts forecast a steep acceleration in second-half earnings. Wall Street sees third-quarter earnings growing by 9.7% year-over-year in the third quarter and by 14.4% in the fourth.

Just as one bad quarter doesn’t make a trend for most companies, that goes doubly so for the broader market. If you’re wondering how stocks can be advancing despite tepid first-quarter growth and some high-profile misses, it’s because they are looking forward.

And as Coach and Netflix just showed, the future’s not always as dire as it appears.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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