Investment Contrarians

Earnings Outlook

A company reports its revenue and earnings on a quarterly basis. The company will then issue guidance of where they see the market in the future, along with any possible developments in either the goods or services they produce or the market in general. This information is then used by analysts, who then make an estimate of where they believe the earnings outlook will be for the company in future quarters. Investors will use this information, in addition to other criteria they may have, to make investment decisions.

Caterpillar’s Warning: What It Means for Your Stocks

By for Investment Contrarians | Apr 24, 2013

What It Means for Your StocksOne of the most worrying signs from the latest batch of economic data is that the global recession might be reappearing. Central banks around the world have been attempting to fuel their economies through massive stimulus, yet these efforts appear to be failing.

Increasingly, the earnings outlook for a number of companies continues to be quite poor for the remainder of the year. This is giving me pause for thought, because these poor outlooks raise the chances that another global recession will occur.

Last week’s data from the Conference Board Leading Economic Index for the U.S. indicated a drop in March. This was the first drop in seven months—certainly a negative move away from the chance of averting another global recession.

More importantly, the Conference Board’s outlook for the next three to six months dropped 0.1% in March, below the median forecast by a survey conducted by Bloomberg. (Source: Smialek, J., et al., “Leading Index’s Drop Points to Slower U.S. Growth: Economy,” Bloomberg, April 18, 2013.)

Manufacturing also declined, as indicated by the Federal Reserve Bank of Philadelphia reporting that its factory index dropped to 1.3 in April from 2.0 in March. (Source: “March’s Coincident Indexes Show Increased Economic Activity in 47 States,” Federal Reserve Bank of Philadelphia web site, last accessed April 23, 2013.) This was a significant reversal from the median forecast, in which expectations were for the index to rise to 3.0.

How does this affect the earnings outlook for corporations? Many companies have been expecting that the global recession could be averted, as each company’s revenue and earnings outlook last fall was fairly positive for 2013. … Read More

Why Earnings Outlooks Are More Important Than This Quarter’s Results

By for Investment Contrarians | Apr 12, 2013

Earnings Outlooks Are More Important Than This Quarter’s ResultsWith the financial reporting season underway, one of the most important considerations is not the most recent quarter’s earnings results, but the earnings outlook companies are giving for the remainder of the year.

One market sector that I like to watch is the retail area that sells to the average American, as this helps give a clear picture of the underlying fundamentals of the U.S. economy.

Family Dollar Stores, Inc. (NYSE/FDO) just released its earnings outlook for the remainder of the year, and it was far below what analysts had expected. In January of this year, Family Dollar offered an expected earnings outlook for fiscal 2013 of approximately $4.20 per share; this has now been reduced to $3.93 a share. (Source: Burritt, C., “Family Dollar Cuts Profit Forecast as Shoppers Cut Back,” Bloomberg, April 10, 2013.)

During the second quarter, Family Dollar reported that same-store sales increased by 2.9%, for stores open longer than 13 months, also coming in below estimates. This company is interesting, as the lower-income market sector is showing continued weakness.

The significant decline for the earnings outlook of each company tells me that all of this quantitative stimulus is doing little to help the average American, as this market sector is not showing any signs of improving.

The lack of job creation and the increase in the number of people pulling out of the jobs market are now having a direct impact on the market sector that caters to millions of people. With continued economic weakness, there is little hope that the earnings outlook will improve anytime soon.

It is actually quite shocking, considering the trillions … Read More

Investment Opportunity Due to a Lawsuit?

By for Investment Contrarians | Feb 11, 2013

Investment OpportunitySometimes the best investment opportunity arises when a situation looks the bleakest. When a firm’s earnings outlook is stable and there is little volatility in the stock, this makes it extremely difficult to identify an investment opportunity, since all the good news is usually priced into the stock.

An interesting situation is taking place now, and I’m surprised it hasn’t happened sooner. The United States Department of Justice (DOJ) is taking the Standard & Poor’s (S&P) unit of The McGraw-Hill Companies, Inc. (NYSE/MHP) to court, alleging that the ratings agency was involved in fraudulent activities.

From 2004 through 2007, according to the complaint, S&P allegedly issued credit ratings on approximately $1.2 trillion worth of collateralized debt obligations and $2.8 trillion of mortgage-backed securities. The government is seeking $5.0 billion from the firm for damages incurred, as they believe the ratings were fraudulently issued. (Source: Pettersson, E., “McGraw-Hill, S&P Sued by U.S. Over Mortgage-Bond Ratings,” Bloomberg, February 5, 2013.)

Initially, the government was seeking a fine of $1.0 billion in addition to an admission of guilt from the S&P unit. Failing to reach an agreement, the government is now escalating the case, along with the fine.

To begin with, I do not like the way rating agencies operate. For those who aren’t aware, a ratings agency is actually paid by the issuer to rate it before being sold to investors. This creates an obvious conflict of interest. For a rating agency that is interested in increasing its earnings outlook and creating a greater investment opportunity for the future, its best interest, in my opinion, is to issue favorable ratings that will … Read More

Bank Stocks at Crucial Crossroads

By for Investment Contrarians | Jan 15, 2013

Bank Stocks at Crucial CrossroadsLast year was a great year to be an investor in bank stocks. We’ve seen a dramatic rebound in the price of most major bank stocks in America as the earnings outlook has improved. Clearly, the earnings outlook at the beginning of last year was far too pessimistic for the majority of bank stocks.

The question: what’s in store for bank stocks in 2013?

Wells Fargo & Company (NYSE/WFC) just released its earnings numbers, and they were very strong, as the firm reported a 24% jump to $5.1 billion in profit for the fourth quarter of 2012 from the year-ago period. For the full year, the company had record income of $18.9 billion, up 19% from 2011. (Source: “Wells Fargo reports record full-year in quarterly net income,” Wells Fargo & Company, January 11, 2013.)

An area of concern is that the net interest margin was down to 3.56%, from 3.89% the previous year. This is the difference between the rate it charges borrowers and the interest it pays depositors.

Refinancing of mortgages accounted for approximately 75% of the total revenue. Clearly, the lower rates that the Federal Reserve has engineered have encouraged a large number of homeowners to refinance, freeing up excess funds to use in other ways.

However, while it seems a great time to be invested in bank stocks, the earnings outlook might be a bit more complicated. The big problem for bank stocks is that they are not able to find enough places to lend in comparison to the massive inflow of deposits.

Bank stocks currently hold $10.6 trillion in deposits at the end of 2012. This … Read More