SMARTMONEY.COM: The Lamest Earnings Season Ever
By PAUL R. LA MONICA
(This report was originally published late Friday)
NEW YORK -- Except for a few stragglers like Cisco (CSCO) and Dell (DELL), we won't be hearing about companies beating whisper numbers or crushing the Street's estimates for a while. The quarterly torrent of earnings reports is coming to an end.
But was anybody even paying attention? Maybe you heard a certain financial news cable channel tout it as 'the most important earnings season ever.' That's like saying opening day of the baseball season is the most important game a team will have to play.ever.
April, to borrow from T.S. Eliot, was the cruelest of months for investors - especially for tech investors. The Nasdaq dropped 15.5% in the month, and at one point was as much as 29% off its March close. But the odd thing is that earnings for many beaten-down Nasdaq companies were fantastic. All too often, Tech Company X reported better-than-expected profits and discussed a positive outlook for the future - but the stock got dumped on the news. It happened to Sun Microsystems (SUNW), PMC-Sierra (PMCS), JDS Uniphase (JDSU) - take your pick of tech blue chips. Odds are, they reported a great quarter and nobody cared.
To bolster my case, I've gone to the extraordinary length of creating a table that shows the earnings gains for the S&P 500 and 11 market sectors. (As of Friday morning, 89% of the S&P 500 companies had reported earnings for quarters ending in February, March or April.) Energy was the biggest winner, but because oil prices skyrocketed from $14 a barrel to $34 a barrel in the last year, that's something of an anomaly. There were other big winners too - like technology, with 31% earnings growth, and utilities, with a 20% gain. And check out that 15.5% gain for financials...in a rising interest rate environment, no less.
The table also shows that most companies beat official Wall Street expectations by a decent amount (whisper numbers aren't included). Overall, 73% of S&P 500 companies reported a positive earnings surprise, while 17% matched the First Call/Thomson Financial consensus.
Was last month just a spring clean for the May Queen? It really makes me wonder. (That was for all you Led Zep fans out there.) How much worse would the sell-off have been if we saw a wave of terrible earnings reports? Here's what I don't get: Stocks, in the long run, are judged by their earnings, but last month, quality earnings took a backseat to doom and gloom. Much of the selling in late March and April was the result of panicking, margin calls and, for some irrational reason, worries that a government-enforced breakup of Microsoft (MSFT) would bode ill for the entire tech sector. All this overshadowed the earnings picture, and sent companies like America Online (AOL) and Qualcomm (QCOM) down as if they were Drkoop.com (KOOP) and Peapod (PPOD).
I'm not saying there shouldn't have been a shakeout or that we should be looking at Nasdaq 6000 right now. Tech stocks in particular were ripe for some tweaking. But now that the storm has washed over the entire sector, good stocks and bad, it's time to look for companies or sectors that have solid growth expectations. And those companies should be rewarded.
So it's not too early to anticipate what the second-quarter numbers will look like come July. Using the trusty Zacks database, I took a peek at a couple of prominent sectors, and the earnings picture for next quarter looks promising. The median expected gain in earnings for 764 reasonably sized and actively traded tech stocks (I eliminated companies with market caps of less than $250 million and trading volume of less than 100,000 shares) is 36%. That's not exactly terrible.
Other sectors look as if they are poised for solid second quarters as well. The median expected gain for drug stocks is 16.7%. For financials, it's 14.3%. Retailers are on track for a 17.4% earnings jump and the median gain for consumer cyclicals is 21.1%. And according to First Call, the overall gain in earnings growth for the S&P 500 is expected to be 18%.
You get the picture. The punishment endured last month by many companies that reported super quarters wasn't rational. And as long as these quality companies continue to rack up impressive earnings gains, investors will eventually notice. (By the way, I'm still looking for suggestions of more quality tech stocks to add to the Rational Readers' Tech Portfolio, so please keep the emails coming. And don't forget to email me with some new ideas for Microsoft commercials either!)
I know what you're thinking: What about the economy? The unemployment rate is down to 3.9%, and inflation is on the rise. The Fed will have to raise rates by 50 basis points this month, and earnings growth will inevitably slow. Those are valid concerns. But we've already seen five hikes in less than a year, totaling a full point and a quarter, or 125 basis points. I know that rate hikes take a little bit of time to kick in, but why haven't these increases put even the slightest dent in earnings yet? Where's this huge drop-off in corporate profit growth? It hasn't happened, and I'd argue that unless the Fed ends up tightening too aggressively and causes a major slowdown in the economy, earnings growth should continue to be healthy as well.
Something to consider as you sit back and bide the time until the July earnings bonanza rolls around - a time that I'd like to dub 'the most important earnings season ever.'
Until October.
For more information and analysis of companies and mutual funds, visit SmartMoney.com at smartmoney.com |
