The market woke up on the wrong side of the bed to start this week. On Monday, the S&P 500 lost 0.3%, while the Dow dropped about 0.7% and the NASDAQ fell 0.2%. And as I write this, it looks like Wall Street is still in a bad mood today.
The reason is because investors are taking time to digest news from the Federal Reserve last week.
As I discussed in last Thursday’s Market 360, the Federal Open Market Committee (FOMC) maintained key interest rates at a range of 5.25%-5.50% last Wednesday. That was widely expected. But what investors were looking for was more clarity on future rate cuts.
The FOMC statement said that achieving its employment and inflation goals are “moving into better balance” and that it “has gained greater confidence that inflation is moving sustainably toward 2%.”
All in all, while Wall Street didn’t get what it wanted, it was a hopeful statement. But then, when Fed Chair Jerome Powell gave a disappointing press conference after the meeting concluded, stocks sold off.
Regarding the prospect of a cut in March, Powell said, “I don’t think that it’s likely that we will reach a level of confidence by the time of the March meeting … I don’t think that is the base case.”
If that weren’t enough to put investors in a sour mood, his comments in a 60 Minutes interview on Sunday certainly would.
I said in a Special Market Podcast to my Accelerated Profits subscribers that Powell essentially said the Fed wouldn’t consider rate cuts until the “middle” of the year.
So, clearly, May 1st is the earliest that we could see key interest rate cuts – possibly June. Then, hopefully, the Fed will have additional key interest rate cuts at its FOMC meetings in June, July, and September.
Keep Your Eye on Earnings
In the meantime, I recommend your focus should be on earnings season. And, thankfully, this is the biggest week for corporate earnings announcements. More importantly, I am anticipating wave-after-wave of positive earnings announcements to propel fundamentally superior stocks higher.
Case in point: NAPCO Security Holdings, Inc. (NSSC).
The stock soared more than 18% to a new 52-week high on Monday (and then rallied to a new high today) after the company crushed analysts’ expectations – while the broader market pulled back.
NSSC makes and sells electronic security products around the world. This includes everything from access control systems to fire alarm systems to video surveillance systems and more. During its second quarter in fiscal year 2024, total sales rose 12% year-over-year to $47.5 million and recurring service revenue increased 25% year-over-year to $18.5 million. Analysts expected total sales of $43.92 million.
Second-quarter earnings surged 221% year-over-year to a record $12.6 million. Earnings per share jumped 209% year-over-year to $0.34, up from $0.11 per share in the second quarter of 2023. The consensus estimate called for earnings of $0.26 per share, so NSSC posted a 30.8% earnings surprise.
Company management stated, “The second quarter of fiscal 2024 was the strongest quarter in our company’s history.” Management noted that it was the 13th straight quarter of record sales for a quarterly reporting period.
So, once again, earnings are working.
Now, there are 104 S&P 500 companies scheduled to report earnings this week, according to FactSet. So, you want to make sure you’re investing in stocks with the best fundamentals.
So, with that in mind, in today’s Market 360, I’ll share 10 stocks that are likely to struggle in the current market environment, due to their weak fundamentals. And then, I’ll share where you can find fundamentally superior stocks that truly represent the crème de la crème of the market.
This Week’s Ratings Changes
After taking a closer look at the latest institutional buying pressure and each company’s financial health, I decided to revise my Portfolio Grader for 97 big blue chips. Of these 97 stocks, 11 were downgraded from a B-rating (Buy) to a C-rating (Hold), and 15 stocks were downgraded from a C-rating to a D-rating (Sell).
I’ve listed the first 10 stocks to sell below, but you can find the full list – including the stocks’ Fundamental and Quantitative Grades – here.
Chances are that you have at least one of these stocks in your portfolio, so you may want to give this list a skim and adjust accordingly.
|Align Technology, Inc.
|Telefonakiebolaget LM Ericsson Sponsored ADR Class B
|International Paper Company
|Interpublic Group of Companies, Inc.
|LyondellBasell Industries NV
|Mobileye Global, Inc. Class A
|Microchip Technology Incorporated
|Altria Group, Inc.
Finding the Best of the Best
With thousands and thousands of stocks to invest in, it can be hard to find fundamentally superior stocks set to prosper during earnings season.
That’s where my Accelerated Profits service can help.
My current Buy List is characterized by 36.8% average forecasted sales growth and 204.6% average forecasted earnings growth. My Accelerated Profits stocks have also benefited from positive analyst revisions.
What’s more, eight of the 10 Buy List companies that have reported beat estimates, with an average 22% earnings surprise.
I fully expect the market to continue rewarding fundamentally superior stocks, just as it does during almost every earnings season. And that’s why we remain focused on these stocks in my Accelerated Profits service.
I remain convinced that we are invested in the crème de la crème over at Accelerated Profits, so our stocks should continue to rally strongly. But of course, I didn’t just pick these names out of a hat…
The system I use in Accelerated Profits helps me pinpoint companies that are primed to post strong earnings results – sending their stocks soaring as a result.
(Already an Accelerated Profits member? Click here to log in to the members-only website now.)
The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owns the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below:
NAPCO Security Holdings, Inc. (NSSC)