A choppy 2018 for the equity markets again has turned sour. Stocks fell for four straight sessions this week — and this time, Treasury yields weren’t to blame. New aluminum and steel tariffs announced by the Trump Administration rattled markets on Thursday. Increasing odds of as many as four Federal Reserve rate hikes this year added to the pressure.
Support levels are reasonably close, which should prevent a significant correction. Still, market sentiment looks notably different than it did just a little over a month ago, when the market had enjoyed an uninterrupted post-election bull run. Since then, however, the market has been choppy at best. That very well could continue for some time: With earnings season largely over, external factors will drive market-wide narratives going for the near term.
Three of the most important earnings reports next week won’t be enough to move the market. But they will give some color as to how fearful investors truly are at the moment. An emerging market growth play will test the market’s risk tolerance. A consumer favorite will show just what multiple investors are willing to pay for quality.
And results from a major grocer no doubt will move that entire sector. Next week could be eventful for the market as a whole — and almost certainly will be for these three stocks.
3 Earnings Reports to Watch: Momo (MOMO)
Earnings Report Date: Wednesday, March 7 before market open
Momo Inc (ADR) (NASDAQ:MOMO) has been volatile enough on its own. In this market, Wednesday’s earnings report could lead to fireworks.
Momo stock has gained 41% since hitting a 52-week low in early December. The acquisition of Tantan – an app similar to Tinder – sent MOMO up 17% in a single session last month. Even after those gains, by any measure, MOMO stock looks much cheaper than other Chinese growth plays. The stock trades at 15x forward earnings, and the average Street target price of $40 implies 25%+ upside.
Those same analysts are projecting 54% revenue growth for Q4. The combination of a cheap multiple and big growth would seem to imply that MOMO is set up nicely for gains on Wednesday if it can top consensus expectations.
But MOMO actually has struggled after past reports. Q3 earnings beat consensus handily — but Momo stock fell almost 19%, and would hit that 52-week low just a couple of sessions later. Slowing user growth has been a chief concern here – and investors may focus on that metric over all others on Wednesday.
Whatever the numbers are, MOMO is likely to sizzle on Wednesday. The options market is pricing in a 12% move — and that might be too conservative. An earnings report can keep the current uptrend going. Anything less, however, and MOMO could have a big fall ahead.
3 Earnings Reports to Watch: Costco (COST)
The response to fiscal Q2 results from Costco Wholesale Corporation (NASDAQ:COST) likely will come down to two factors. First, what multiple are investors willing to put on one of the market’s best stories? And secondly, does the market, and the Street, again believe that Costco is mostly immune to incursions from Amazon.com, Inc. (NASDAQ:AMZN)?
As to the first question, Costco stock isn’t cheap, at 28x Street EPS estimates for fiscal 2018. But, then again, Costco stock hardly ever is cheap. With sales numbers for the first two months of the quarter already disclosed — and impressive — Q2 should be a strong quarter. The surprising closure of a number of stores by Walmart Inc (NYSE:WMT) unit Sam’s Club should provide a boost to comp sales going forward. And there’s likely to be more detail on the company’s benefit from, and plans for, its lower tax rate going forward.
Costco likely will put up a very strong quarter. But will investors reward a strong quarter – or see it as already priced in?
As far as Amazon goes, the jury still remains somewhat out. COST shares tanked when Amazon announced it was acquiring Whole Foods Market back in June, falling 16% in a matter of weeks. It’s since recovered those losses, and then some. Investors seem to again see Costco as a long-term retail winner. But trading has been choppy so far this year, and any weakness in Wednesday’s report could bring competitive concerns back to the forefront.
Overall, there’s more than enough to be optimistic toward COST next week. Valuation does look high, but based on consensus FY19 estimates, COST’s multiple drops to a more reasonable 25x. And choppy trading of late — in line with the market as a whole — has brought the stock down 5%-plus from an all-time high just below $200 reached in late January.
With a strong quarter, and with the average Street target price at a healthy $209, I expect COST to finally break through that $200 barrier.
3 Earnings Reports to Watch: Kroger (KR)
Earnings Report Date: Thursday, March 8 before market open
Kroger Co (NYSE:KR) also saw its shares plunge after the Amazon-Whole Foods deal was announced. But what’s often forgotten is that Kroger stock plunged the day before as well. Disappointing guidance after fiscal Q1 results raised fears that margins for Kroger — and the entire grocery space — were moving downward for good. The entrance of Amazon into the industry only amplified those concerns.
I recommended my subscribers buy that dip in KR, and the stock eventually retraced all of its losses. But Kroger has weakened again – and Thursday’s report looks potentially dangerous.
The chart shows some danger, with the 20-day moving average reverting from support to resistance. Expectations have risen, with the Street looking for almost 19% EPS growth in fiscal Q4.
Meanwhile, it looks like investors have returned to being worried about the grocery industry again. The valuation of Albertsons implied by its acquisition of Rite Aid Corporation (NYSE:RAD) shows a great deal of skepticism toward the space as a whole. KR itself has pulled back over 10% from late January highs.
If Kroger doesn’t post a blowout report on Thursday morning, that pullback very well could extend. And any weakness shown by one of the industry’s giants will spill over into the rest of the sector.
Hilary Kramer is the editor of GameChangers, Breakout Stocks, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.