So far, the beginning of earnings season has been a mixed bag. The numbers as a whole appear relatively solid, with Factset reporting that 70% of companies beat consensus earnings estimates in the early going.
That was enough to move the S&P 500 up about 5% from late March lows. But after a pair of selloffs to end the week, major market indices remain basically flat so far this year. And the hope of many bulls that strong earnings would overcome external pressures like rising Treasury yields and trade war concerns appears to be a bit optimistic — at least for now.
But I still believe U.S. equities have substantial upside as the year goes on. And there’s still plenty of time for earnings to inspire the confidence needed to drive those gains. Three key earnings reports next week could go a long way in doing so.
A tech giant has the potential to move markets on its own. A long-time income favorite will try and get out of a multi-year rut. And a fallen angel in the restaurant space will try and prove there’s still growth left in what has been a tough sector of late. All three releases are particularly important for the reporting companies, and in providing a potential spark to the market as a whole.
3 Earnings Reports to Watch: Alphabet (GOOGL)
Earnings Report Date: April 23 after market close
Investors across the tech space will be closely watching the first quarter report from Alphabet Inc (NASDAQ:GOOGL,NASDAQ:GOOG) on Monday afternoon. Like the market as a whole, GOOGL has seen choppy trading over the past couple of months. And like the market as a whole, GOOGL has room for significant upside if it can re-establish credibility with investors.
Fundamentally, Alphabet looks in position to do so. The Street is looking for 20% EPS growth year-over-year. A 26x P/E multiple doesn’t seem to incorporate that type of growth – particularly when considering the roughly $100 per share in net cash on the Alphabet books. But from a sentiment standpoint, Alphabet management will need to answer some tough questions on Monday’s conference call. Google’s potential exposure to the data privacy concerns raised by the scandals at Facebook, Inc. (NASDAQ:FB) no doubt will be a key topic.
And so GOOGL’s trading on Monday seems like a guidepost for the rest of the market. If investors really are prepared to start focusing on the good news from earnings, Alphabet stock should rise. But if the market remains more worried about the potential risks coming down the line, GOOGL likely stays stuck in its current range.
3 Earnings Reports to Watch: Verizon (VZ)
Earnings Report Date: April 24 before market open
It’s likely too much to ask for first quarter earnings to lead to a big move for Verizon Communications Inc. (NYSE:VZ). VZ stock hasn’t moved for five years now. Saturation and intense competition in the US wireless space has pressured growth – and investor attitudes.
But a strong report could at least be a step in the right direction – and perhaps garner some interest from value investors. VZ stock does look cheap, at barely 10x 2019 consensus EPS. A dividend yield near 5% looks highly attractive, even with Treasury yields climbing toward 3%. If Verizon can convince investors it has any potential for steady growth, there is a case for long-term upside here.
After years of stagnant trading, one report alone won’t be enough. But with rumors again swirling surrounding a merger between Sprint Corp (NYSE:S) and T-Mobile US Inc (NASDAQ:TMUS), Verizon has an opening to regain favor with the market. A Sprint-T-Mobile tie-up in theory would lighten competition – and pricing pressure. VZ at the moment is pricing in basically zero growth.
If Verizon can show some strength with both subscribers and pricing, VZ stock could be in a position to rise if more good news follows Tuesday’s release.
3 Earnings Reports to Watch: Chipotle (CMG)
Earnings Report Date: April 25 after market close
In this market, I’d be very cautious with Chipotle Mexican Grill, Inc. (NYSE:CMG) ahead of Wednesday afternoon’s report. CMG stock has tanked after each of its last two earnings reports. The company – and the stock – still haven’t recovered fully from its E. coli outbreak. And yet investors have bid Chipotle stock up 34% from a five-year low touched in February.
That low followed a disappointing Q4 earnings report. But investors have shrugged off that miss, thanks to optimism toward new CEO Steve Ellis and hopes for a turnaround.
The problem for CMG stock on Wednesday is that optimism is going to meet reality. Ellis hasn’t had enough time yet to make any real changes. The turnaround has been stalled for several quarters now, with little sign of improvement in the second half of 2017. And CMG now trades at 31x Street EPS estimates for 2019.
In other words, Chipotle stock has risen on hope – but Wednesday’s report will show the conditions on the ground. If there hasn’t been the change some bulls are expecting, CMG easily could be in for a third consecutive post-earnings plunge. The risk of high expectations meeting middling performance seems particularly high here.
That said, if Chipotle can show some progress, it could be great news for CMG stock – and the sector as a whole. Restaurant stocks, with a few exceptions, haven’t performed particularly well despite a strong economy. If Chipotle shows a path to improvement, it could brighten the outlook for the entire industry. That seems a lot to ask, however, and it’s not an outcome I’d bet on ahead of Wednesday’s release.
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.