We are now roughly halfway through the second quarter 2019 earnings season, and the results have been much better than expected, powering the S&P 500 to new all-time highs.
To date, 44% of the companies in the S&P 500 have reported earnings. Over 75% of them have reported earnings above expectations (above average), while over 60% have reported sales above expectations (also above average). Further, the magnitude of earnings beats has averaged around 5.4% (above average) and the magnitude of sales beats has averaged 1.2% (above average, too). Broadly, then, corporate sales and earnings have been much better than expected this quarter.
Context is important here. Heading into the quarter, Wall Street was expecting fairly ugly results. For the second quarter in a row, earnings were expected to decline, representative of a global economic slowdown. Halfway through earnings season, profits are down year-over-year. But, they are down less than expected, representative of the idea that the global economy is starting to stabilize and pick up steam.
Consequently, investors have broadly interpreted Q2 earnings as a positive catalyst, and stocks have subsequently rallied to all-time highs.
Amid this Q2 earnings season rally to all-time highs, the market has been led by a few shining stars. Let’s take a look at those shining stars, and see if these hot stocks, which smashed Q2 earnings expectations, have what it takes to stay on a winning path for the rest of the year.
Post-Earnings Rally: 19%
% Gain Since Earnings: 20%
Social media company Snap (NYSE:SNAP) crushed second-quarter estimates everywhere it mattered. The company added 13 million new users in the quarter. They were only supposed to add about 4 million. Revenues rose 48%. They were only supposed to rise around 37%. EPS came in at a loss of 6 cents per share. They were supposed to lose 10 cents a share. The third-quarter revenue and EBTIDA guides were also well above expectations.
Broadly, Snap crushed it in Q2. The user growth narrative, which was proclaimed dead in late 2018, has come surging back to life thanks to the Android app revamp. Advertisers, who were shunning the platform in 2018 due to limited reach and poor ad capabilities, are now flocking to the platform as the user base expands and as Snap builds out more and smarter ad opportunities. Furthermore, margins, which have been ugly for a long time, continue to make meaningful upward progress. Losses are narrowing.
Everything is moving in the right direction for SNAP stock. Q2 earnings confirmed that. But, with shares having more than tripled in 2019, one must reasonably ask: How much of this improvement is already priced in? A lot of it. The reality is, though, that in today’s low rate environment, any growth stock with a good growth narrative will head higher. Snap’s growth narrative is really good right now, so it is fairly likely that this stock continues to power higher for the foreseeable future.
Post-Earnings Rally: 10%
% Gain Since Earnings: 10%
After a string of disappointing and sluggish earnings reports, global internet giant Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) finally hit a home run with its second-quarter earnings report. Revenues topped expectations, and revenue growth accelerated from the prior quarter (on the heels of big revenue growth deceleration last quarter). Margins also came in ahead of expectations, and compressed only 100 basis points year-over-year (the smallest compression in recent memory). Profits topped expectations by the most they’ve ever topped expectations.
In a nutshell, Alphabet’s Q2 earnings report checked off the boxes it need to (revenue growth isn’t permanently decelerating and margins are finally starting to stabilize) while preserving the strength of the company’s long-term drivers (YouTube is firing on all cylinders, the Cloud business is rapidly expanding share, the smartphone business is starting to gain traction and Waymo continues to build momentum in the self-driving space).
GOOG stock should continue to move higher. The growth narrative here was “fixed” by strong Q2 numbers. Investors will now adopt a more optimistic attitude about the company’s long-term profit growth prospects. This sentiment pivot will push the multiple higher. At the same time, analysts will raise estimates as Alphabet’s numerous non-ad businesses continue to build momentum. This combination of multiple expansion and higher estimates will keep GOOG stock on a winning trajectory for the foreseeable future.
Post-Earnings Rally: 20%
% Gain Since Earnings: 16%
Renewed semiconductor market strength propelled test equipment giant Teradyne (NASDAQ:TER) to report stellar second-quarter numbers which blew estimates out of the water. Revenues were supposed to simply inch higher this quarter by less than 2%. Instead, Teradyne reported a robust 7% revenue growth rate in Q2, led by reinvigorated semiconductor test equipment demand. Profits topped expectations, too, and management delivered above-consensus revenue and profit guides for Q3.
Zooming out, TER stock has been adversely impacted over the past few months by a global semiconductor market slowdown. But, signs are starting to emerge that this slowdown is reversing course. Global semiconductor sales rose month-to-month in May for the first time this year. Multiple semiconductor companies reported much better than expected Q2 numbers. Many of those same companies delivered above-consensus Q3 and full-year 2019 guides.
Broadly, sentiment across the whole semiconductor market is dramatically improving. So long as U.S.-China trade tensions continue to cool and central banks globally remain supportive of the current economic expansion, semiconductor market sentiment and fundamentals should continue to improve into the back half of 2019. As they do, Teradyne’s growth trends should similarly improve, and TER stock should stay in rally mode.
Post-Earnings Rally: 12%
% Gain Since Earnings: 13%
Athletic apparel brand Skechers (NYSE:SKX) smashed expectations in its Q2 earnings report, and in response, SKX stock rallied by more than 10% to new 2019 highs. Revenues easily cleared expectations, led by significant revenue growth acceleration from Q1 (5.2%) to Q2 (13.7%), 25%-plus growth in the international business, and a multi-quarter high 4.9% comp. At the same time, profits easily cleared expectations, too, driven by 260 basis points of SG&A leverage and 160 basis points of operating margin expansion.
Zooming out, SKX stock is now up more than 70% year-to-date. That big rally can be attributed to the fact that — for the first time in a long time — revenues and margins are heading higher together. Skechers has never had a problem with revenue growth. This company has been a consistent double-digit revenue grower over the past several years, mostly because it dominates the mid-price athletic sneaker niche. But, the niche isn’t terribly high margin, and Skechers has been having to spend an arm and a leg to grow global awareness. Thus, over the past few years, consistent revenue growth has been accompanied by choppy margin performance.
In late 2018 and into 2019, however, margins have turned a corner. In each of the past three quarters, operating margins have risen by over 100 basis points year-over-year. Revenue growth trends have remained healthy, too. Thus, big revenue growth is now being accompanied by big profit growth. Investors are consequently readjusting their long-term profit growth outlooks here, and SKX stock is rallying on those favorable readjustments.
Will the stock go higher? At $40, the stock seems fully valued. As such, while the narrative here is gaining momentum, valuation friction may ultimately cap further upside in the near term.
Post-Earnings Rally: 13%
% Gain Since Earnings: 46%
Memory giant Micron (NASDAQ:MU) hit a home run with its third-quarter earnings report, and ever since, MU stock has been on a huge uptrend, to the tune of a near 50% gain in about a month.
Micron’s third-quarter numbers were much better than expected. Everything was down in the quarter — revenues, margins and profits. But, everything was down by less than expected. Revenues fell less than expected. Margins compressed less than expected. Profits didn’t fall by as much as expected. The fourth-quarter guide wasn’t great. But, it also wasn’t as bad it could’ve been.
The broad takeaway from Micron’s Q3 report was that a light is starting to form at the end of the tunnel for this memory giant. Since then, that light has only become brighter. Multiple signs have emerged that global semiconductor market fundamentals are reversing course and improving, headlined by a month-to-month global semi sales gain in May and multiple favorable Q2 reports and Q3 guides from several semiconductor companies.
As that light has grown brighter, MU stock has stayed in rally mode. The reality is, this stock was priced for death. Death isn’t happening. Instead, it appears that EPS is bottoming out, and that profit growth will come back into the picture sometime within the next few quarters. As this reality of renewed profit growth gains mainstream traction, investors will continue to flood back into MU stock.
Post-Earnings Rally: 10%
% Gain Since Earnings: 10%
Finland-based Nokia (NYSE:NOK) inspired confidence into its investor base following a strong second-quarter earnings report that affirmed favorable growth trends heading into arguably this company’s biggest catalyst in recent memory — the mainstream roll-out of 5G coverage and infrastructure.
Nokia topped Q2 revenue and profit estimates, with a fairly strong 5% constant currency revenue growth rate. But, that wasn’t the important part of the earnings report. Instead, the important part was that management maintained its aggressive full-year 2019 and full-year 2020 revenue and profit guides, which call for significant operating margin expansion and huge EPS growth. That can all be attributed to what management is calling favorable 5G trends.
If those favorable 5G trends play out, Nokia has a realistic opportunity to net somewhere around 45 cents in EPS by fiscal 2021. Based on a market average 16 forward multiple, that implies a fiscal 2020 price target of over $7. NOK stock trades below $6 today. Thus, upside potential over the next several quarters is compelling.
It’s also likely to materialize. Nokia’s second-quarter print and management commentary seem to affirm that the widespread roll out of 5G coverage is kick-starting a new cycle of network upgrades. Those network upgrades should drive Nokia’s EPS towards 45 cents over the next two years, leading NOK stock to prices above $7.
Post-Earnings Rally: 8%
% Gain Since Earnings: 8%
Shares of global coffee giant Starbucks (NASDAQ:SBUX) rallied big this earnings season after the company reported third-quarter numbers that came in well ahead of expectations. Global comps were supposed to rise 4%. They rose 6%, led by above-expected comparable sales growth in every geography. Revenues were supposed to grow less than 6%. They grew by more than 8%. Margins were supposed to fall 60 basis points. They only dropped 20 basis points. Further, management hiked its full-year revenue and profit guides.
The big story here is that that traffic growth is back for Starbucks. Although comparable sales growth has been consistently positive for Starbucks for the past several years, those positive comps have been driven entirely by price hikes. Before this quarter, Starbucks hadn’t reported a positive global traffic gain since the fourth quarter of 2017, and hadn’t reported a traffic gain in excess of 1% since the second quarter of 2016.
But, in the third quarter of 2019, Starbucks reported positive traffic growth. More than that, they reported 3% global traffic growth, and the traffic gains were broad-based. The Americas segment reported its biggest traffic gain since the second quarter of 2016, while China/Asia-Pacific reported its biggest traffic gain since the first quarter of 2017.
With the return of traffic growth, Starbucks’ long-term growth narrative got a big boost. Now, prices and customers are going up at a steady rate. That implies steady revenue and profit growth going forward. A lot of that is priced in today, with SBUX stock trading at an above-average 35-times forward earnings. But, not all of it. As such, going forward, SBUX stock will be defined by a tug-of-war between valuation and growth, which should ultimately produce tepid gains.
As of this writing, Luke Lango was long GOOG and NOK.