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Earnings season picks up next week at a critical time for the market. With the mini-crisis in Iran apparently fading, happy days are here again for U.S. stocks. Strong trading early Friday suggests equity markets will close the week at all-time highs once again.
At this point, it doesn’t seem like earnings reports next week need to be hugely impressive to keep the rally going. After all, earnings in recent quarters haven’t been that impressive. U.S. companies are in a so-called earnings recession, yet U.S. stocks have risen regardless.
With external factors like the trade war and interest rates positive, investors don’t appear to need blowout earnings. ‘Good enough’ results will be good enough for the market. As the earnings calendar fills up next week, these seven companies, in particular, need to avoid the type of pitfall that could set off alarms for investors.
JPMorgan Chase (JPM) and Bank of America (BAC)
Earnings Report Date: Tuesday, Jan. 14, before market open (JPM); Wednesday, Jan. 15, before market open (BAC)
JPMorgan Chase (NYSE:JPM) and Bank of America (NYSE:BAC) lead a banking sector that heads into earnings season at an interesting point. Both stocks, along with big bank peers Wells Fargo (NYSE:WFC) and Citigroup (NYSE:C), have broken out nicely in the last few months. The gains were driven in part by strong earnings reports across the sector in October.
This time around, however, expectations are much higher. Big bank stocks certainly aren’t expensive, but with JPM stock, for instance, up 22% in the last three months, there’s not much room for error in earnings for any member of the group. Nor can a market at all-time highs afford soft results or a negative outlook from its financial industry leaders.
Bank earnings, in short, need to deliver. At this point in the rally, they probably can’t move the market higher on their own — but soft reports from the sector almost definitely would send it lower.
Earnings Report Date: Tuesday, Jan. 14, before market open
There are two questions ahead of fiscal second quarter earnings from Aphria (NYSE:APHA) on Tuesday morning. The first is: what will earnings look like? And the second is: will it matter?
After all, Aphria has posted impressive results of late. The company was the first major cannabis stock to reach profitability, if on an Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) basis. It’s guiding for solid fiscal 2020 results, the type of results which cannabis investors seem to be seeking.
But that performance has done nothing for the stock, or the sector. Aphria stock has stabilized since October, but continues to drift in the wrong direction. It hasn’t traded much differently than other cannabis stocks like Canopy Growth (NYSE:CGC) and Cronos Group (NASDAQ:CRON).
In that context, investors should watch the reaction to Aphria earnings quite closely. After the last two quarters, investors have shrugged at strong results from Aphria and punished the likes of Canopy and Aurora Cannabis (NYSE:ACB) for missing estimates. If APHA stock again fails to rally after an impressive quarter, investors elsewhere in the sector should be on guard ahead of a cluster of cannabis earnings releases due in February.
Delta Air Lines (DAL)
Earnings Report Date: Tuesday, Jan. 14, before market open
There’s an odd similarity between APHA stock and airline stocks like Delta Air Lines (NYSE:DAL). Airline stocks, too, seem to have delivered what investors want. Earnings generally have grown nicely in recent years, though the 737 MAX debacle at Boeing (NYSE:BA) has caused some short-term disruption of late. The economy is strong. Demographic tailwinds (pardon the pun) should help the industry, as millennials focus on experiences over products, and the rising middle class in developing markets creates new passengers.
Airlines even have managed the intense price competition in the sector, in the process converting long-time skeptic Warren Buffett of Berkshire Hathaway (NYSE:BRK.A,NYSE:BRK.B). Yet the sector has underperformed. DAL stock, for instance, has gained 21% total over the past five years. The S&P 500 has risen over 58%.
As a result, there’s a case for airline stocks to be big winners in 2020, as I argued last month. And if the sector is going to outperform, Delta must post a strong report on Tuesday monring. Delta doesn’t fly the 737 MAX, making its results more reflective of the underlying health of the industry. As a result, the sector needs Delta to deliver good news — even if recent history suggests a strong report alone won’t be enough to change investor minds.
UnitedHealth Group (UNH)
Earnings Report Date: Wednesday, Jan. 15, before market open
Fourth quarter results from UnitedHealth Group (NYSE:UNH) on Wednesday morning look reasonably important for UnitedHealth, which hardly is the type of company for which a single quarter usually changes the story. UNH stock heads into the release just off an all-time high — but the stock still trades at 18x current 2021 earnings per share consensus estimates.
So there’s the question of whether UnitedHealth can deliver another strong quarter. But as with other big reports, the equally intriguing question will be how investors react. Does the market see valuation full to the extent that nothing short of a blowout moves UNH higher? Or does UnitedHealth still get rewarded for what likely will be at least an impressive quarter?
If UNH can rally after earnings, that bodes well for other quality names near the highs, which too might have more gains remaining.
PPG Industries (PPG)
Earnings Report Date: Thursday, Jan. 16, before market open
Coatings and paint manufacturer PPG Industries (NYSE:PPG) isn’t going to move markets on Thurday with its fourth quarter report. But it’s worth at least checking in on PPG’s results.
Good earnings from PPG would be a good sign for both stocks. A strong reaction from the market to such a report would help as well, given that PPG at 19x forward earnings remains cheap enough to rally going forward.
But a weak report could have wider consequence. PPG has a reasonably broad reach. If its management is worried on Thursday — which I don’t expect will happen — investors should be too. As a result, a strong report from PPG would go along to helping peers and calming investor nerves ahead of the deluge of reports coming in the second half of the month.
CSX Corporation (CSX)
Earnings Report Date: Thursday, Jan. 16, after market close
Railroad operator CSX Corporation (NYSE:CSX) has a sneakily important fourth quarter report due on Thursday evening. CSX itself needs a good report: its stock has managed to grind higher since plunging after second quarter results in July, but still sits almost 9% off its highs. Strong numbers and a bullish outlook will give CSX a chance to at least target new highs.
Earnings here are important for the sector as well. CSX isn’t the largest railroad operator, but it’s been one of the most aggressive in implementing “precision scheduled railroading”. And as I wrote last year, there are increasing worries that the strategy is a problem, or at least no longer a benefit, to CSX stock. There’s a case that the benefits at this point simply have been achieved, meaning margin improvements will be much more difficult to drive going forward.
A strong Q4 from CSX would assuage those worries. A weak quarter will amplify them. And so earnings seem likely to have a big effect on CSX — and to set the tone for the rest of the sector as earnings season ramps up.
As of this writing, Vince Martin has no positions in any securities mentioned.