Editor’s note: InvestorPlace’s Earnings Reports to Watch is updated weekly. Please check back next week for our latest earnings picks.
The worry cited in this space over the past few weeks has been consistent. The earnings calendar has been tapering off since mid-February — removing a catalyst that had moved stocks higher. Fourth-quarter earnings reports — with some help from the final quarter of U.S. tax reform benefits — were generally strong. Without that boost, however, the fear was that investors would focus on other factors, and with slowing global growth and worldwide political unrest, they might not like what they would see.
For the most part, that fear has been unfounded. The S&P 500 is up double-digits year-to-date, and touched a five-month high on Thursday. All-time highs are just a few percentage points away. But Friday’s selloff — the index is off more than 1% in early trading — shows that concerns still lurk. International growth remains weak. That puts an enormous amount of pressure on the U.S. consumer to keep the domestic economy — and stock market — humming.
Again, one session doesn’t make a trend. But with valuations creeping back up, investors might start again focusing on the risks in the market. The earnings calendar next week should give some signs as to whether that will be the case going forward. One of the hottest — and highest-risk — sectors gets a report from one of its key constituents. A high-priced consumer darling will try and keep its momentum going. And a housing leader will provide another gauge of sentiment in that critical industry.
The results from these three companies may not move the market. But the reaction to the results, for a number of reasons, could give some color as to how investors are feeling as they wait for the earnings calendar to ramp up next month.
Cronos Group (CRON)
Earnings Report Date: Tuesday, March 26, before market open
Marijuana stocks like Cronos Group (NASDAQ:CRON) have been among the biggest beneficiaries of the market rally this year. At the highs earlier this month, CRON stock had tripled since late November. A $1.8 billion investment in CRON stock by tobacco giant Altria (NYSE:MO) drove some of the enthusiasm. But the return of the ‘risk-on’ trade has boosted the entire sector, providing another tailwind.
Of late, however, investors are viewing the space, and Cronos stock, with more caution. CRON stock has pulled back about 17%. Analysts are becoming more skeptical as well.
Cronos earnings on Tuesday morning aren’t likely to change the fundamental case here all that much. Like other marijuana players, Cronos remains an early-stage company. A ‘beat’ to earnings estimates doesn’t in turn mean the valuation goes higher; results for a single quarter simple aren’t that material, yet.
But commentary will be closely watched. Most notably, what exactly does Cronos plan to do with the $1.8 billion in cash received from Altria? And even for investors with little or no exposure to cannabis, trading in CRON stock is worth monitoring. Are investors looking for any good news as an excuse to buy more? Or is the converse true: does CRON stock sell off simply because investors again need a reason to buy high-flying pot stocks? If marijuana sector investors again are focusing on risk, that would be a strong sign that the rest of the market might start doing the same.
Earnings Report Date: Wednesday, March 27, before market open
Housing plays like homebuilder Lennar (NYSE:LEN) started moving lower before the broad market last year. It wouldn’t be shocking if history repeated itself in 2019. With input and labor costs moving higher, and demand for new housing appearing to slow, homebuilders and their suppliers remain at risk of getting squeezed.
LEN stock has bounced 28% since hitting a multi-year low in late December. But with the stock trading at less than 8x forward EPS estimates, there’s still room for upside — if the company can continue restoring investor confidence.
The fiscal Q1 earnings report on Wednesday morning could help on that front — to an extent. The first quarter is Lennar’s slowest quarter, limiting its importance somewhat. Still, the full-year outlook — particularly with interest rates coming down — will be watched closely not only by LEN shareholders, but investors across the housing universe. Many stocks in the sector remain cheap; Lennar earnings could help show whether they should be.
Lululemon Athletica (LULU)
Earnings Report Date: Wednesday, March 27, after market close
It was only a few years ago that earnings reports from retailers were seen as proxies for the health of the U.S. consumer. If Macy’s (NYSE:M) or JCPenney (NYSE:JCP) — or looking back a bit further, Sears Holdings (NASDAQ:SHLDQ) — were struggling, the most likely culprit was consumer confidence.
Obviously, in the age of Amazon.com (NASDAQ:AMZN) and shrinking mall traffic, that’s no longer the case. But earnings from Lululemon Athletica (NASDAQ:LULU) can been seen as a similar, albeit much less broad, indicator. Lululemon certainly has a much more narrow base in terms of both geography and its customer base. But if consumers still are willing to pay up for Lululemon merchandise, that suggests some level of confidence.
The report also should give some color to the ‘athleisure’ fashion trend. Nike (NYSE:NKE) stock fell this week after slowing North American sales. A similar miss from Lululemon might suggest that athletic wear strength is fading. And that could echo across the sector, with investors in stocks like adidas AG (OTCMKTS:ADDYY) and Under Armour (NYSE:UA,UAA) watching closely.
Here, too, the reaction to the report will be telling. Are investors willing to push higher a stock that already trades at 34x forward earnings? Particularly when that stock is in retail — one of the most challenged sectors in the market?
Again, none of these earnings reports can move the market. But there’s a theme to watch here. If CRON sells off, if LEN numbers don’t convince investors and if LULU can’t rise higher, then the question ahead of earnings season becomes clear. What will it take for stocks to reclaim all-time highs? It’s going to take strong corporate earnings — but if next week’s batch isn’t enough, next month’s might not be, either.
As of this writing, Vince Martin has no positions in any securities mentioned.