This looks increasingly like an equity market that will be impacted, if not driven, by outside factors. The choppy trading of the past six weeks has been driven by everything from volatility hedging to treasury yields to the imposition of new tariffs by the Trump Administration.
But in the market itself, it’s important to remember that the news still looks rather strong. For now, that strength looks like enough to have some modest optimism looking forward. Companies still are figuring out exactly how, and where, to invest their savings from corporate tax reform. Unemployment and consumer confidence figures remain bullish. The recent earnings season was strong, and the next wave should begin in earnest next month.
In the meantime, there are three key earnings reports to watch next week. None necessarily will move the market on their own. But their results could provide more good news to keep investor confidence high. At the least, they’ll give more clues as to the health of key sectors.
A report from one of tech’s best performers should show if investors are starting to become concerned about valuations in an industry that has led the overall market rally. Numbers from a major retailer will show whether that battered industry has hopes of recovering. And investors will learn more about what could be in one of the biggest acquisitions of all time. External factors may still move the market next week, but all investors need to keep an eye on these three earnings reports as well.
Earnings Reports to Watch: Dick’s Sporting Goods (DKS)
Earnings Report Date: Tuesday, March 13, before market open
For retailers of all stripes, earnings reports are fraught with peril, and that also seems true for Dicks Sporting Goods Inc (NYSE:DKS) ahead of its fiscal fourth-quarter earnings report on Tuesday morning.
There are a couple pieces of good news for DKS, both short-term and long-term. In the near-term, Dick’s already has moved much of the bad news out of the way. It gave guidance for fiscal 2018 (ending January 2019) with its Q3 report back in November. At the time, management projected earnings-per-share to fall as much as 20% next year, due to investments in the e-commerce business and falling gross margins.
That guidance should keep investor expectations low.-But it didn’t include the impact of tax reform, which should offset at least some of the projected weakness next year. Meanwhile, the Street still is somewhat behind the story, with the average target price of $35 suggesting 10% upside from current levels.
Still, at this point, it’s tough to have too much confidence in any retailer ahead of earnings. Investors have been trained to sell first and ask questions later. Same-store sales continue to be relatively weak, and margin pressure is continuing. And this is a key report for Dick’s, with Q4 covering the important holiday period and investors no doubt expecting at least some increase in FY18 guidance. If sales didn’t improve in Q4, and Dick’s winds up reinvesting most of its tax reform benefit in labor and promotions, DKS easily could slip below $30 on Tuesday.
As far as retailers go, Dick’s is the leader in sporting goods, and it looks like an intriguing choice longer-term. But as has been proven so many times over the past few years, it’s a risk to own any retailer ahead of any earnings release, let alone as important as this one.
Earnings Reports to Watch: Adobe (ADBE)
Earnings Report Date: Thursday, March 15, after market close
Adobe Systems Incorporated (NASDAQ:ADBE), on the other hand, has a very different set of risks heading into its fiscal Q1 report on Thursday afternoon. ADBE has almost tripled in the last 25 months, with hardly any type of sell-off along the way. And it has already gained another 23% so far in 2018.
One key reason for the rally is that Adobe has met or beat Street expectations for thirteen consecutive quarters. And there’s not much reason to see that changing on Thursday. Adobe is coming off a Q4 report in December, where it handily beat Street expectations. In what the company calls its Creative Cloud business, Adobe simply dominates the market with programs like Photoshop and Illustrator. The company’s marketing platform is even having success against entrenched incumbents Salesforce.com, Inc. (NYSE:CRM) and Oracle Corporation (NYSE:ORCL).
So Adobe’s trading on Thursday likely comes down to valuation. It’s a story that has played out so many times in this big market rally. What price — and what earnings multiple — are investors willing to pay? And can a stock simply outrun expectations? That seems to be the biggest risk to ADBE on Thursday afternoon.
Still, so far this year, high flyers like Netflix, Inc. (NASDAQ:NFLX) and Amazon.com, Inc. (NASDAQ:AMZN) have managed to soar after earnings despite their high valuations. With ADBE at a more reasonable 30x forward earnings, there’s room for a rally here, too, if the company can show yet another earnings beat. Analysts will raise their price targets — currently modestly below the ADBE stock price — adding more fuel to the rally. Even in this market, Adobe’s combination of revenue growth and margin expansion should be enough to push the stock even higher.
Earnings Reports to Watch: Broadcom (AVGO)
Earnings Reports Date: Thursday, March 15, after market close
The Q1 numbers from Broadcom Ltd (NASDAQ:AVGO) might be the least interesting part of Thursday afternoon’s release. Rather, analyst and investor focus likely will be on the post-earnings conference call — and any discussion about the company’s hostile takeover of Qualcomm, Inc. (NASDAQ:QCOM).
After a tumultuous week, there will be plenty of questions for that call. Does Broadcom still believe it can dodge a CFIUS inquiry by re-domiciling into the U.S.? Are those plans still on the table, and still on track? Where is the R&D spend that Broadcom has promised to make behind 5G going to go? And how does the company see that important shift playing out?
That said, it’s unlikely the quarter necessarily will move AVGO stock all that much. The Qualcomm merger is going to hang over the stock for several months, even if Broadcom does win a majority of Qualcomm board seats in the shareholder vote next month. Regulatory review — from not just CFIUS, but U.S. and foreign antitrust authorities — will be a long and difficult process.
I don’t see much of an edge in either AVGO or QCOM stock at this point, given how many possible outcomes remain in their battle. But on Friday, at least, we should have a bit more clarity into what remains a complicated — and fascinating — deal.
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.