Keeping Your Portfolio Safe as Earnings Disappointments Mount

Lowered earnings forecasts make a focus on quality critical in 2019

Yesterday, Macy’s stock suffered its biggest one-day drop since going public 27 years ago.

After cutting its annual profit and sales forecast, the department-store chain dropped nearly 18%. It’s down another 1% on Friday morning at the time of this writing.

This is the latest in a series of high-profile earnings disappointments that are raising concerns about a global slowdown — and how that might affect the stock market.

It began last month when FedEx cut its 2019 earnings forecast. FedEx’s CFO said “Global trade has slowed in recent months and leading indicators point to ongoing deceleration.”

Next, it was Apple. Last week, the company announced its sales would come in short of previous projections. Samsung followed earlier this week when it lowered its fourth quarter guidance.

Wednesday, it was alcoholic beverage-producer, Constellation Brands. The third largest beer producer in the U.S. fell as much as 11% on Wednesday after cutting its full-year profit outlook. On that same day, the homebuilder Lennar said it would delay releasing a 2019 forecast due to “softness” and “uncertainty” in the housing sector.

As we scan the entire market, we’re seeing lowered earnings forecasts across the board. Since last month, at least five Wall Street firms have cut their 2019 forecasts for stocks. Some analysts are even calling for an earnings recession in 2019 (defined as two consecutive quarters during which S&P 500 earnings decline on a year-over-year basis). Morgan Stanley’s chief U.S. equity strategist puts those odds at 50%.

This is significant because, simply put, earnings are a big deal. Over time, the value of stock prices comes down to earnings.

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***This isn’t surprising for readers of Louis Navellier, the legendary investor and editor of Growth Investor

Strong earnings growth is a hallmark of Louis’ market approach, so he’s been ahead of this news. Last month, he told his readers what to expect.

Heading into the New Year, there is one main factor that we need to be aware of: More difficult year-over-year comparisons. Earnings will be decelerating in every quarter of 2019. This isn’t too surprising considering the phenomenal earnings in 2018.

The New Year will be characterized by a narrow stock market, which means that institutional investors will be chasing fewer stocks. Think of the flow of funds into the stock market like a garden hose nozzle. In 2018, the garden hose nozzle was relatively wide and encompassed many stocks. In 2019, it’s likely to be set on a much narrower stream.“

In response to this changing earnings environment, Louis points toward the need to focus on strong fundamentals.

What this means is that there is a massive leadership change underway. And it will be imperative for us to identify which stocks will be able to sustain strong sales and earnings growth in the New Year.

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***One of the sectors which Louis believes will lead the way with strong earnings is energy

In a note to subscribers on Thursday, he wrote:

The fourth-quarter earnings season is about to get underway, so very soon the real winners and losers will be revealed. Personally, I expect stocks with the strongest sales and earnings momentum to emerge as market leaders. And one bucket of stocks that should come out on top is energy.

The energy sector is forecast to report more than 90% annual earnings growth for the fourth quarter. That’s stunning, especially when you consider that the S&P 500 is only expected to post fourth-quarter earnings growth of 17.4%, down from the 28.2% annual earnings growth reported in the third quarter.“

Given this, it wasn’t surprising when the Wall Street Journal reported yesterday that energy stocks in the S&P 500 are the best-performing group in the index — up 8.4% over the first six trading days of 2019.

Louis goes on to identify nine specific energy stocks that are in good shape for earnings season. To learn more and find out how else Louis is positioning himself, click here.

At a minimum, look at your portfolio and evaluate the earnings strength of your positions. With earnings growth coming under a microscope, it’s more important than ever to be positioned in strength in 2019.

***Meanwhile, two of our resident trading experts see reasons why markets may keep rallying

In a note to their Strategic Trader subscribers, John Jagerson and Wade Hansen pointed toward two clues that suggest more market gains could be coming. One is a reversal of the relationship between the Russell 2000 (RUT) and the S&P 500 (SPX).

The RUT combines and measures the value of 2000 small-cap stocks, which are typically more volatile. The SPX combines and measures the value of 505 … large-cap stocks, which are typically more stable.

Because traders usually consider small-cap stocks to be riskier than large-cap stocks, the RUT tends to outperform when traders are feeling confident about the future, and the SPX tends to outperform when traders are feeling nervous about the future.

Looking at the RUT/SPX relative-strength chart for the past few months, you can see that traders started losing confidence (in RUT) in late June but started to regain some confidence in late December.


Some of this bullish move in the RUT is likely due to a short-squeeze effect … However, to start squeezing the shorts, some traders have to start buying the stocks outright. These are the bulls that are signaling their renewed confidence to buy the dip.”

This doesn’t mean John and Wade are ready to claim the markets are definitely heading higher …

Seeing signs of bullish life does not mean we have confirmed a new bull market … However, it does tell us that the bearish selling pressure that gripped the market in December of 2018 has weakened.

To read more from John and Wade, including their second bullish indicator, click here.

***Finally, Matt McCall’s subscribers continue to post gains in their marijuana positions

Regular readers know that we believe legal marijuana is one of the biggest investment opportunities of this generation. A new wave of legalization has already — and will continue to — create new markets and massive stock winners. Our resident marijuana expert, Matt McCall has been positioning his readers for gains in marijuana, and more of them came this week.

On Wednesday, Piper Jaffray initiated coverage of cannabis producers. This follows news from our Monday Digest in which J.P. Morgan began coverage of GW Pharmaceuticals, the first cannabis-based drug to receive FDA approval. These approvals are further evidence of the marijuana megatrend continuing to gain momentum.

The news on Wednesday sent shares of Canopy Growth up 13%. Canopy happens to be one of the marijuana stocks Matt recommended to his Investment Opportunities subscriber. They’re currently up almost 30%.

Canopy is now above Matt’s buy-up-to price, but other recommendations in his Marijuana Boom portfolio are still actionable. To learn more, click here. And if you missed Matt’s favorite marijuana/CBD stock, you can read about it for free here.

Have a good evening,

Jeff Remsburg

P.S. Where should the savvy investor look for performance in this market?

Legendary investor Louis Navellier believes this year’s tax reform law will cause an avalanche of money to rush into the markets in the coming months.

In his Growth Investor newsletter, he’s recommending that his readers buy specific dividend stocks that are positioned to take advantage. To learn more about the dividend stocks he is recommending for immediate purchase, check out Louis’ critical report here.

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