When I read the newswires each morning, I scour for trading opportunities; but the one thing that I have been noticing lately is the lack of moderate revenue growth among the reporting companies. I’m not saying that I would like to see revenues growing at 30%–40% or more, but even growth in the low double digits would suffice at this point, given the global stalling.
The market is all giddy about the first-quarter earnings season early on, but I really don’t understand why investors are that happy. I’m clearly not seeing the same things.
As of Monday, about 104 S&P 500 companies have reported during the earnings season, and their results have been in line with the previous quarters, in which about 67.3% beat earnings-per-share (EPS) estimates, according to Thomson Financial.
Again, the first-quarter earnings are encouraging—but not exactly something to get euphoric about.
The reality is that while two-thirds of the S&P 500 companies are beating estimates during the earnings season, the revenues side is another story—a story that I feel is being ignored by investors.
Companies are beating the earnings estimates assigned by Wall Street. In some cases, the earnings estimates are lower than previous estimates; in this regard, the companies are, in some cases, actually only meeting or beating reduced estimates during this earnings season.
Moreover, we are also seeing legitimate earnings manipulation by companies that want to please Wall Street and investors. This is not illegal and can often return business intelligence (BI) for shareholders.
By pursuing aggressive cost cutting and containment, companies can reduce the cost side and present a much better earnings picture, even … Read More
Apple Inc. (NASDAQ/AAPL) finally broke below $400.00 last Thursday, an occurrence that I recently discussed in Investment Contrarians. As I said, the short term will generate volatility for the stock, but I continue to believe there is still hope the company can turn around going forward.
The problem with a momentum company like Apple is that with its rapid rise in share price to over $700.00, there’s immense risk for investor mistakes to occur if the company does not consistently deliver. And I’m not talking about delivering just average results; momentum companies such as Apple have to deliver exceptional results to the market and please investors.
In the case of Apple, soft growth over the last several quarters has proved devastating to the stock and can cause investor mistakes.
After beating Thomson Financial earnings-per-share (EPS) estimates by 22.5% in the fiscal 2012 second quarter, Apple came back and offered up three straight dismal quarters in which the company fell short on earnings in two of the three quarters and barely beat in the most recent. Ignoring these falls inevitably led to investor mistakes, as demonstrated by the share price.
The same is said for the overall stock market. Traders gave investors strong gains in the first quarter, but that has not been the case in April, as global growth concerns are surfacing. The aftermath has been selling pressure and the greater likelihood of more selling down the road.
The two cases of Apple and the overall stock market demonstrate the need to be careful with momentum stocks to avoid potential investor mistakes.
The reality is that once the market euphoria … Read More
Apple Inc. (NASDAQ/AAPL) has been punished in the financial media and on Wall Street, having lost its edge. Trading above $705.00 in September 2012, the stock has snapped back to reality, recently declining to a two-week low of $419.00 on March 4, 2013.
At the current price, there are arguments on both sides regarding whether Apple is worth a gamble or if it is the beginning of a new downtrend below $400.00.
In my view, the business landscape for Apple has become much more competitive. You have “Android”-powered devices accounting for a large portion of the smartphone market. This is mainly thanks to the overwhelming success of Samsung Electronics Co. Ltd.’s “Galaxy” series of smartphones and tablets. I have both an “iPad” and a Galaxy phablet (a large smartphone with the capabilities of a tablet). I must admit after using the iPad for a few years, I actually find it much better than the Galaxy.
Yet the market is still mixed.
While the iPad remains the dominant tablet, Apple’s reign in the tablet sector is clearly in jeopardy; but in my view, until a better tablet surfaces, the company will continue to produce the top tablet.
Investment manager Ken Fisher increased his holdings of Apple by 58.12% at prices ranging from $420.05 to $549.03, with an average price of $467.05. (Source: “Ken Fisher Buys Apple Inc, American Express Co, Coinstar, Sells America Movil, Petrobras, Visa,” Forbes April 11, 2013.)
The chart of Apple below shows a bearish descending triangle. The $400.00 level is a key support level. Yet a good quarter could easily turn the tide and drive the share … Read More
Aluminum maker Alcoa Inc. (NYSE/AA) reported its earnings results on Monday, officially kicking off the first-quarter earnings season. While some in the media touted the fact that Alcoa beat earnings estimates, in reality, it’s nothing to get excited about. The stock market looks to be agreeing with me, as Alcoa was under some selling pressure after it reported.
Alcoa remains a key global company, but it probably doesn’t carry the weight it used to have on the market. However, the company does still offer some insight into the global economy.
The company only managed to narrowly beat earnings-per-share (EPS) estimates, reporting adjusted earnings of $0.11 per diluted share, above the Thomson Financial consensus estimate of $0.08.
It was a decent reading, but as I have said in the past, what I want to see is revenue growth to drive earnings—not cost control or some other variable.
Let’s take a closer look at Alcoa.
Revenues came in at $5.8 billion in the first quarter, down three percent year-over-year, which the company blamed on lower prices on the London Metal Exchange and some issues with its production in Europe.
That’s fair, but I want to see revenues grow in the global economy. Companies that expand revenues to drive earnings are what you want to see. In my view, those companies that are reporting solid revenue growth are important, especially given the somewhat stagnant state of the global economy. My thinking is that once the global economy begins to take off, especially in Europe and the emerging markets in Latin America and Asia, these same companies will likely be ready to deliver much … Read More
I think maybe it’s time to start putting your money in the piggy bank to avoid any major investor mistakes.
With the Dow and the S&P 500 at record highs, I’m trying to find reasons to want to buy in this market. However, I’m finding it difficult to even want to buy, as I still feel a stock market correction is on the way.
I’m sorry, but I can’t tell you when this will happen or by how much. All I know is that you need to be careful to avoid possible investor mistakes.
We have the first-quarter earnings season that started on Monday, and if you believe the early estimates, there will not be many happy traders and investors out there.
FactSet estimates earnings will contract by 0.7% in the first quarter, followed by an overly optimistic second half, predicting an explosive earnings rally of 10.1% and 15.6% for the third and fourth quarters, respectively. I’m not sure why FactSet is this giddy, but in my view, for these growth metrics to emerge, all of the stars will have to align.
I’m still not convinced corporate America is set for another growth spurt. The Federal Reserve knows this. Based on the recent non-farm payrolls reading showing a dismal 88,000 new jobs, I just can’t comprehend how the country is set to achieve revenue growth.
I may sound like a downer, but I consider myself more of a realist who wants to avoid investor mistakes.
And Main Street has also appeared to have forgotten the debt, while the government and Congress are still battling it out to come up with … Read More
It’s that time again. On Monday, aluminum maker Alcoa Inc. (NYSE/AA) will once again grace us with its presence, as the bellwether gets set to tell how the global economy is feeling when it gets the first-quarter earnings season going. The company has long been a staple for the earnings season, as aluminum is used in numerous industrial applications globally and represents a decent barometer on the condition of the global economy. From automobiles to aircraft, packaging to building, and construction to consumer electronics, a strong report from Alcoa this earnings season will keep the current rally going.
Yet a few weeks ago, there were some early warning signs. Bellwether shipping company FedEx Corporation (NYSE/FDX) and farm equipment seller Caterpillar Inc. (NYSE/CAT), both considered to be barometers of the global economy, suggested some global stalling.
The first-quarter earnings season is expected to see earnings fall 0.7%, but growth is estimated to return to 10.3% in the third-quarter earnings season and 15.6% for the fourth-quarter earnings season; clearly there are some optimistic estimates, according to FactSet. (Source: “Earnings Insight,” FactSet Research Systems Inc. web site, March 22, 2013, last accessed April 2, 2013.) The contraction in the first-quarter earnings season is not a big deal, but the optimistic growth expectations going forward appear to be somewhat too optimistic and could result in a market letdown.
According to FactSet, about 84 S&P 500 companies have warned of lower-than-expected earnings, versus 24 companies that provided positive guidance.
The sectors issuing the worst forecasts include materials, health care, and consumer staples, so you may want to stay away from these sectors.
The top-performing earnings … Read More
Michael Dell is no fool. After watching the declining demand for personal computers (PCs) and its disastrous impact on the PC makers, Mr. Dell had an idea: sell the company to private equity and let them try to convert Dell Inc. (NASDAQ/DELL) into a “mini IBM.”
The new Dell will be focused on serving the technology needs of large companies, which may include the possible divestiture of its struggling PC business. (Source: Gupta, P. and Damouni, N., “Dell to go private in landmark $24.4 billion deal,” Reuters, February 5, 2013.) A decade ago, International Business Machines Corporation (NYSE/IBM) followed a similar strategy after selling off its PC business to Lenovo Group Limited; so far, the move has been successful for IBM, according to my stock analysis.
The recent operating results from Dell suggest that its founder, Michael Dell, did the right thing. In the fiscal fourth-quarter earnings season, the company earned $0.30 per diluted share, down 31% year-over-year. Yet the red flag at Dell was an 11% decline in revenues. While the results narrowly beat the Thomson Financial consensus estimates, it’s clear that the PC business is dying, according to my stock analysis.
While the $24.0-billion deal is facing opposition from two major shareholders, Southeastern Asset Management and T. Rowe Price, that are both demanding more money, I really cannot see how this will happen. The results point to a company on the decline unless something is done; based on my stock analysis, there’s more of a chance of survival with private equity for Dell.
The strategy shift that is expected to take place is not a surprise, given the … Read More
As corporate earnings season continues for S&P 500 companies, it is becoming quite evident that revenue growth is lacking across many sectors of the economy. However, we are continuing to see growth in corporate earnings per share.
How is this possible? One method is through share buybacks. S&P 500 corporations, which are generating very high levels of cash, are buying back shares and reducing the number outstanding, which increases the corporate earnings-per-share level.
From April 2011 through October 2012, S&P 500 companies bought back and retired approximately eight billion shares, according to FactSet. This has been a significant driver for corporate earnings over the last two years. (Source: Cheng, J., “Investors See a Way Forward: Buybacks,” Wall Street Journal, January 21, 2013.)
If this level of share buybacks for S&P 500 corporations continues this year, we can expect to see corporate earnings increase by between five percent and 10%, without any organic growth in corporate earnings and flat revenues.
Another driver for S&P 500 share prices will be that the dividend yield will still remain very attractive when compared to U.S. Treasuries.
While revenue growth needs to begin to increase substantially at some point, I think 2013 will be another year in which the combination of a strong dividend yield and modest corporate earnings growth will result in the continuation of investment funds rotating out of the bonds and into equities.
Personally, I think a lot of buybacks are ill timed. While I like to see corporate earnings increase, the problem with many S&P 500 companies is that they tend to buy shares at the wrong time.
When the S&P … Read More
There are various measures to determine investor sentiment regarding the general market. The most obvious is to take a look at a broad index, such as the S&P 500, and see where it’s currently trading. Because price is truth, the market does not lie. If people are bullish or bearish, their actions in buying and selling shares within the S&P 500 will be translated into corresponding price moves.
However, it is interesting to look at corollary indications to determine how strong the underlying trend really is. Investor sentiment is extremely difficult to predict, as is anything in life. While the future is unknown, by understanding the strength of current investor sentiment, we can help form a picture about what the future holds for the S&P 500.
State Street has an Investor Confidence Index, developed by Kenneth Froot, a Harvard University professor, and Paul O’Connell of State Street Associates. According to State Street, “The State Street Investor Confidence Index measures investor confidence or risk appetite quantitatively by analyzing the actual buying and selling patterns of institutional investors.” (Source: State Street, last accessed January 14, 2013.)
Let’s take a look at this metric of investor sentiment in relation to the S&P 500.
For the month of December, the Investor Confidence Index moved upward, just slightly higher than November, which was the low of 2012. Professor Froot commented, “As has been true for some months now, global institutional investor confidence remains weak as institutions continue to shy away from equities.” (Source: “Investor Confidence Index rises slightly in December by 0.4 to reach 80.9,” State Street, December 26, 2012, last accessed January 14, 2013.)… Read More
There has been so much focus on the fiscal cliff that I feel traders are ignoring the problems of slowing growth in corporate America.
The fourth-quarter earnings season begins tomorrow with Alcoa Inc. (NYSE/AA), the first DOW stock to report in this earnings season. Alcoa is one of the world’s top aluminum makers; the stock is also a good indicator for the global economy, as aluminum is used in many industrial applications, including aircraft, automobile, commercial transportation, packaging, building and construction, oil and gas, defense, consumer electronics, and industrial applications.
In the third-quarter earnings season, Alcoa beat on Thomson Financial consensus earnings, but its revenues are an issue, which will likely be the situation with many U.S. companies. For Alcoa, revenues are estimated to fall 6.3% in the fourth-quarter earnings season, followed by a 1.3% rise in the 2013 first-quarter earnings season, according to Thomson Financial.
For the fourth-quarter earnings season, the overall revenue growth is estimated to be three percent, according to FactSet (Source: “Earnings Insight,” FactSet, December 14, 2012, last accessed January 4, 2013.) This is simply not what you would expect if the economy was healthy. And while there is some hope and optimism for the fourth-quarter earnings season, I expect disappointment.
Based on the current estimates, earnings for the S&P 500 are estimated to rise three percent in the fourth quarter, according to FactSet. So far for the fourth quarter, 79 S&P 500 companies have issued negative earnings-per-share (EPS) guidance, versus only 30 companies reporting positive guidance.
The top-performing earnings growth predicted for the fourth-quarter earnings season is in the financial sector, according to FactSet.
The … Read More
The only people crying “Y2K” back in 1999 were information technology (IT) professionals looking for job security. Even without their help, disaster was averted, the rising sun greeted the world on January 1, 2000, and life was good.
Fast-forward to 2012, and the doomsayers are at it again. Except this time, it’s the members of the U.S. government wailing about an “economic Armageddon” if the fiscal cliff isn’t averted come January 1, 2013. Unlike Y2K, the fiscal cliff is a real issue that needs to be addressed; but the end result will be the same: at the last second, disaster will be averted.
Unfortunately, as we make our way to the end of the calendar year, indecisiveness and political jockeying are spooking the global investing community and wreaking havoc on the markets. At a time when the international community needs the U.S., the world’s largest economy, to show confidence, it’s the political infighting capturing the spotlight.
In spite of all the wailing and gnashing of teeth, the fiscal cliff will be avoided and life as we know it will continue. And that’s when the real problems begin. With the centric fiscal cliff stealing all the limelight, it’s been tough for investors to focus on the fact that America’s economic rebound is contingent on a financially strong international community. Domestic economic growth cannot be stimulated in isolation.
In January 2013, investors will see that the real underlying factor affecting the stock market is the global economy and its impact on corporate earnings.
On November 15, it was announced that the collective economies of the eurozone fell by 0.1% between July and … Read More
The sub-prime credit crisis that surfaced in 2008 drove Lehman Brothers to bankruptcy, caused significant upheaval, and drove the U.S. and global economy into a recession. The aftermath was a structural change to the way banks do business, specifically the amount of risk that is assumed by a bank via sophisticated strategies. So far, the change coined the “Volcker Rule,” set in place by economist and ex-Federal Reserve Chairman Paul Volcker, appears to be capping the speculative trades made by the banks, which is good.
Banks have altered the way they do business and have shown positive strides along the way. JPMorgan Chase & Co. (NYSE/JPM), the first of the major bank stocks to report earnings, blew away revenues and earnings estimates. Wells Fargo & Company (NYSE/WFC) beat on earnings but fell slightly short of estimates despite an eight percent year-over-year increase. In the case of JPMorgan, the recovery in the housing market and the demand for mortgages helped drive revenues. (Source: “Mortgage boom leads to profit surge for JPMorgan, Wells,” Yahoo! Finance, October 12, 2012.)
In my view, the results are fairly good for the two bank stocks, and they indicate that the banks are able to grow their business volumes across the board despite the mixed economic recovery in the U.S. And with the housing market and economy continuing to improve, I feel bank stocks will as well.
The majority of the big banks have paid back part or all of their government loans. Bank stocks are showing promise, and expectations are the third-quarter earnings season will provide some upside surprises. Of course, the impact from the stalled … Read More
The global economy is stalling, don’t let anyone tell you otherwise; and unless the eurozone and Europe can recover from the financial crisis, my prognosis for the global economy is not good.
Judging from what I’m currently witnessing in the market action, unless the third-quarter earnings season provides abundant upside surprises, which I doubt, stocks could be set for a shock in the upcoming quarters. The reality is that I continue to feel traders are lackluster in their assessment of the current global risk and the potential impact on stocks.
The International Monetary Fund (IMF) and World Bank are warning us. China saw its gross domestic product (GDP) growth for this year reduced to below the key eight-percent threshold to 7.7% by the World Bank. In China, there are clear indications of slowing economic recovery resulting from the lower demand for copper, cement, and energy. The World Bank also cut its GDP growth estimate to 7.2% this year for the East Asia and Pacific area. (Source: “Growth to Slow in East Asia and Pacific in 2012,” The World Bank, October 8, 2012.)
We also have a potential letdown in China’s neighbor, India, after the IMF cut GDP growth in this emerging market to 4.9% for this year compared to the previous 6.1% estimate. (Source: International Monetary Fund)
And if you don’t believe the IMF or World Bank, take a look at what the multinational companies are saying, many of which source much of their revenue flow from the global marketplace. These companies with worldwide operations have firsthand accounts of the business conditions and, therefore, should not be ignored.
Bellwether Caterpillar … Read More
Alcoa, Inc. (NYSE/AA) will be the first Dow stock to report in the third-quarter earnings season, as it kicks off with its results on October 9. The company is one of the world’s top aluminum makers. The stock is also a good indicator for the global economy, as the metal is used in many industrial applications, including aircraft, automobiles, commercial transportation, packaging, building and construction, oil and gas, defense, consumer electronics, and industrial.
In the second-quarter earnings season, Alcoa beat slightly on earnings but revenues are an issue, as will likely be the situation for many U.S. companies. For Alcoa, revenues are estimated to fall 12.7% in the third-quarter earnings season followed by a 5.0% decline in the fourth-quarter earnings season.
Overall revenue growth is estimated to be flat, down from 1.9% growth at the start of the third quarter, according to FactSet. This is not what you would expect if the economy was healthy. And while there is some hope and optimism for the third-quarter earnings season, I expect disappointment across the board.
Based on the current estimates, earnings for the S&P 500 are estimated to fall 2.6% in the third quarter, which would end the 11 straight months of earnings growth, according to FactSet (www.FactSet.com). So far for the third quarter, 82 S&P 500 companies have issued negative earnings-per-share (EPS) guidance versus only 21 companies reporting positive guidance.
The top performing earnings growth predicted for the third-quarter earnings season is in the financials sector at 10.4%, according to FactSet.
The two weakest areas of earnings growth in the third-quarter earnings season are predicted to be the energy and … Read More
As we near the end of the second-quarter earnings season, we are seeing soft revenue growth or declines across the board, despite the fact that about 64% of the 400 S&P 500 companies that have reported have beaten earnings per share (EPS) estimates as of August 7.
First of all, the number of companies beating on the earnings side would likely be much lower if not for the fact EPS estimates were cut by Wall Street. Earnings have grown a muted 0.6% during the second-quarter earnings season.
Take a look at the revenue side. Only about 41.0% of these S&P 500 companies have beaten the revenue estimate during the second-quarter earnings season, well below the 10-year average of 61.0%. The second-quarter earnings season revenue results are the weakest since the first-quarter earnings season of 2009 with growth at a mere 2.2%.
This is a red flag and clearly suggests the stalling of the global economies and its impact on companies.
What I noticed is not only the poor revenue showing, but also the numerous big-cap companies showing muted demand for technology spending.
The results from some of the leading technology companies during the earnings season indicate a worrisome situation.
Apple Inc. (NASDAQ/AAPL), Wall Street’s technology darling, disappointed after coming in at the short end. The fumble was partly blamed on consumers delaying their purchases in anticipation of the debut of the “iPhone 5” in September. Strong products from rivals are also presenting some headaches for Apple, including the “Galaxy 3” smartphone by Samsung Electronics Co. Ltd. (OTCBB/SSNLF).
Intel Corporation (NASDAQ/INTC) came up short on the revenue end. Paul Otellini, Intel’s … Read More