As my regular readers know, over the past couple of months, I’ve repeatedly raised my concerns that the stock market is increasingly becoming out of touch with the underlying reality of our economy. Now, the latest batch of reports from companies is showing just how inflated the stock market really is.
One market segment that I have warned readers about is the retail sector. In my opinion, the retail sector has become far overvalued in terms of potential corporate earnings growth.
Now that we’re coming into the holiday season, I believe this year is going to be one of the worst for the retail sector in generating any corporate earnings at all.
It really boils down to two things: the consumer and the companies within the retail sector.
The average American, as we all know, is still getting the same wages, getting hit with a higher payroll tax this year, and is still uncertain about their future due to high unemployment levels.
Considering the situation of the average American, companies within the retail sector are literally doing everything possible to convince consumers to spend in order to increase revenues and, hopefully, generate some corporate earnings.
Unfortunately, this heavy amount of competition for fewer dollars means disappointing corporate earnings.
Target Corporation (NYSE/TGT) just recently reported its third-quarter results, with corporate earnings falling 46% year-over-year. While part of the decrease was due to a disappointing launch in Canada, much of the decline in corporate earnings was due to consumers’ unwillingness to spend. (Source: “Target Reports Third Quarter 2013 Earnings,” Target Corporation, November 21, 2013.)
You don’t have to believe me when I … Read More
When it comes to the recent batch of corporate earnings releases, some investors might be cheering. But if you look a bit closer at the results, you will notice the underlying fundamentals aren’t as strong as they first appear.
One thing to remember: in the equities market, it’s all about expectations. A company might report corporate earnings of $100 million, but if analysts in the equities market were expecting $150 million, the results would actually be disappointing.
The reason for this is that the equities market is a discounting mechanism for future corporate earnings. Analysts and investors estimate what the next 12–24 months might bring in terms of corporate earnings and accordingly adjust their valuations for various stocks in the equities market.
What’s interesting to note in this corporate earnings season so far is that the spread between actual and estimated corporate earnings is declining. This means companies are having difficulty exceeding expectations.
So far, 244 of the S&P 500 companies have reported corporate earnings, and while 75% have beaten corporate earnings estimates, on average, they have only exceeded these expectations by 0.8%. The four-year average is 6.5%. (Source: FactSet, October 25, 2013.)
And if you listen to executives at various companies within the equities market, you will notice another common theme: companies are having difficulty finding and generating revenue growth.
Of the S&P 500 firms in the equities market that have reported corporate earnings so far, only 52% have exceeded revenue estimates—far below the four-year average of 59%.
This is why they are issuing dividends and buying back shares; they can’t figure out a better way to invest the … Read More
As someone who’s been involved in this business for many years, one thing that never surprises me is that people make the same mistakes over and over again.
Taking a look at different sectors, it’s quite interesting to see how market sentiment has gotten so poor in one area but is so exuberant in another. The funny part is that corporate earnings appear to have nothing to do with the current level of market sentiment.
Investors who have been in the markets for a while will remember the “dot-com” bubble of the late 90s. During that time period, market sentiment for any stocks that had “.com” in the name was through the roof in optimism. Sure, the stocks had no corporate earnings or real path to generating corporate earnings, but the web sites had plenty of viewers.
It’s too bad that views on a web site don’t translate into corporate earnings or cash.
We all know what happened next: reality eventually hit market sentiment, and these high-tech flyers crashed hard.
Ah, but this time is different, you might say.
It is true that many of the high-tech companies are extremely strong fundamentally, generating high levels of corporate earnings, including firms like Google Inc. (NASDAQ/GOOG). However, it appears we are reaching a level of market sentiment frenzy in technology stocks that I haven’t seen since the late 90s.
The latest example is a report that the company Snapchat, Inc. has just secured an additional round of financing that values the company at $3.6 billion! (Source: “Snapchat Is Mulling Another Huge Round at a $3.5 Billion Valuation,” AllThingsD.com, October 25, 2013.)
You … Read More
With the S&P 500 hovering around its all-time highs, I think it’s quite interesting to read some of the latest corporate earnings reports and get a sense of what’s really happening in the global economy.
One of the most international companies within the S&P 500 is Caterpillar Inc. (NYSE/CAT). The firm recently released its third-quarter 2013 corporate earnings report, in which the firm poured some cold water on expectations. Revenue during the quarter was down 18% year-over-year, and corporate earnings were down 44% year-over-year. (Source: Caterpillar Inc., October 23, 2013.)
That’s not even the worst part. The company also brought down guidance for both revenue and corporate earnings for the foreseeable future.
In its corporate earnings release, Caterpillar cites several issues that it’s worried about, including uncertainty regarding U.S. fiscal and monetary policy, the health of economic regions globally (including the eurozone and China), and a lack of demand from customers.
Because revenue and corporate earnings growth is questionable, the company is taking the only smart action it can—reducing its own cost base. Obviously, no company can force a customer to buy their product, but it can keep its operations as lean as possible. To that end, the firm has cut 13,000 jobs globally over the past year, reduced pay and incentives, and initiated the “implementation of general austerity measures across the company.”
Considering Caterpillar is a large firm within the S&P 500 and it has its fingers on the pulse of the global economy, do any of these comments give you hope or confidence that either the domestic or international economies are about to surge upward in growth? Not … Read More
One of the themes that I’ve been reiterating over the past few months has been my concern over the potential for growth in corporate earnings. While companies in the S&P 500 have reported extremely strong corporate earnings over the past few years, we might be reaching a peak in the cycle.
As you know, businesses and the economy move through a cycle, from the trough to the peak and back down. Following the depths of the recession in this cycle, companies in the S&P 500 instituted significant cost-cutting and share buyback strategies, which have helped boost corporate earnings significantly, sending the economy up toward the peak.
But at some point, you can’t cut costs any further and revenues need to accelerate. This is my worry for many S&P 500 companies; if revenues aren’t growing, at some point, corporate earnings will begin to disappoint expectations, and the cycle will head back downward.
New data reported by FactSet Research Systems Inc. (NYSE/FDS) indicates that a record number of S&P 500 companies are issuing negative guidance for corporate earnings since the company began tracking this data in 2006. (Source: FactSet Research Systems Inc. web site, last accessed October 2, 2013.)
So far, 89 companies out of the S&P 500 have issued negative guidance for corporate earnings, while only 19 have issued positive earnings guidance. The previous high for companies in the S&P 500 issuing negative guidance was 88 firms during the second quarter of 2013.
It’s interesting to note that as the S&P 500 made new all-time highs this year, earnings guidance is continually being revised downward. The 19 firms so far issuing … Read More