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Thursday April 13, 4:56 pm Eastern Time
worldlyinvestor.com Sector of the Day
Strong Earnings Don't Help, and Weak Earnings Kill
By Emily Burg, Correspondent
The earnings game has turned deadly. Beating the Street doesn't stop investors from piling out.
In the good old days on the slap-happy Nasdaq, if investors paid attention to earnings at all, it was to drive a tech high-flyer yet higher on the back of a bullish earnings report.
But now, it seems that even strong earnings can only do so much to help this sinking market. And earnings reports that fail to meet expectations are suddenly cause for a sell-off not only of the offending stock, but the sector and market as well.
``I went into this week thinking earnings would be a catalyst to move stocks and markets higher,' says Peter Yuen, a strategist at Merrill Lynch. ``But all of the stocks that reported strong earnings are trading down.'
Indeed, many analysts lay the Nasdaq's trouble this week at the feet potential earnings trouble at two tech bellwethers. Motorola (NYSE:MOT - news) said Tuesday that it expects an earnings slowdown in coming quarters, and Goldman Sachs' Rick Sherlund Wednesday downgraded of Microsoft's (Nasdaq:MSFT - news) revenue estimates.
Microsoft, of course, was at the center of last week's turmoil as well; the panic selling started last Monday on fears that the ruling in the government's antitrust case against the software maker would go against Microsoft, and continued Tuesday after it did.
Tech Double Whammy
``The double whammy of Motorola and Microsoft caused the damage this week,' says Jeff Warantz, equity strategist with Salomon Smith Barney. ``There's a herd mentality on the Nasdaq that turns on a dime.'
Optimists may hope, then, some strong earnings reports will push the Nasdaq back into positive territory. But it doesn't seem like that's going to happen.
Yesterday, semiconductor maker Advanced Micro Devices (NYSE:AMD - news) reported first-quarter net income of $1.15 per share, blasting past the Street's expectations of 58 cents. Although AMD surged in after-hours trading, it's now down 1% at 75. Rival chipmaker Intel (Nasdaq:INTC - news), on the other hand, is up 4 at 126.81. Intel is expected to report earnings next week.
Salomon's Warantz thinks that AMD's strong report helped the Nasdaq to get off to such a strong start today, though it lost gains toward the close -- yet more evidence that strong earnings don't pack the market punch that they once did.
The story was repeated in several other high-profile tech stocks that reported on Wednesday, all of which beat analysts' expectations but few of which reaped the benefits today.
Rambus (Nasdaq:RMBS - news) reported second-quarter operating earnings of 15 cents a share, which beat the Street by a penny. Currently it's trading down 5% at 203. Redback Networks (Nasdaq:RBAK - news) reported first-quarter pro forma earnings of 5 cents a share -- its first profitable quarter -- but that stock is trading down 11% at 85.
Ariba (Nasdaq:ARBA - news), still unprofitable, reported a second-quarter loss narrower than the Street expected. The stock has managed to trade in positive territory all day, but now is only up 1% at $72.75.
Only Altera (Nasdaq:ALTR - news) can really boast about gains on positive results: it's trading up 4% at $85.
Virtual Circle Reverses
That's created the conundrum the market now faces. Tech-stock valuations were fueled by sky-high expectations for future growth, thus further boosting valuations. But with companies routinely beating the Street's expectations, the thrill faded.
``The market has already priced in stronger earnings for tech companies,' says Merrill Lynch's Yuen.
``There's so much hope and hype priced into these tech stocks,' says Bill Meehan, chief market analyst at Cantor Fitzgerald. ``Earnings were a primary reason leading the Nasdaq to its top on March 10.'
That leaves little, other than technical bounces, to actually propel the markets higher at this point. ``There's not enough from earnings to support the market,' Yuen says.
Spotlight on Sun
Sun Microsystems (Nasdaq:SUNW - news), one of the bluest of the blue-chip tech stocks, is set to report third-quarter earnings today after the market closes. But even if Sun's earnings beat the Street's expectations of 23 cents per share, its unlikely to move the Nasdaq higher. WhisperNumber.com reports whisper numbers of 24 cents per share for Sun.
``No matter what Sun reports, if the Nasdaq tanks, Sun is going with it,' says Shebly Seyrafi, an analyst with AG Edwards.
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