Earnings Estimates Coming Down Fast
internetstockreport.com
Morning Report for Monday, July 23, 2001
Even stock analysts, a notoriously optimistic bunch, have now given up on
a rebound in corporate earnings this year.
According to Chuck Hill of First Call, S&P 500 earnings will likely fall
17% this quarter from the comparable period a year ago. Companies are
beating lowered estimates this quarter, but not by much. Third-quarter
warnings are already on pace for a record, and analysts now expect a 9%
drop in profits next quarter. For the fourth quarter - when comparisons
begin to get easy and analysts had been expecting a strong rebound -
estimates have plunged to a 2.4% gain, and will likely head much lower by
the time the quarter arrives.
Just one more reason why stocks remain mired in a trading range here. Hill
estimates that the S&P 500 is more than 15% overvalued at current levels,
based on earnings and interest rates, a valuation method similar to the
one used by the Federal Reserve.
There are more earnings reports on tap for this week, such as Check Point
Software (NASDAQ:CHKP) this morning, which is up 10% after topping lowered
estimates, Amazon.com (NASDAQ:AMZN) tonight, and GoTo.com (NASDAQ:GOTO)
Wednesday night, but the four reports that mattered - Intel (NASDAQ:INTC),
Microsoft (NASDAQ:MSFT), IBM (NYSE:IBM) and GE (NYSE:GE) - were all
disappointing. We devoted space to Intel, IBM and Microsoft, but not GE,
which was a real head-scratcher: earnings were up 15%, but revenues
declined by 3%. Watchdogs have said the company manages quarterly earnings
to smooth out rough spots, and the disparity between earnings and revenue
in the second quarter would seem to give some credence to that argument.
Speaking of analysts, the case filed by an investor who claims he lost
money on InfoSpace (NASDAQ:INSP) because of Merrill Lynch analyst Henry
Blodget's buy rating on the stock has been settled for $400,000.
As Chris Nerney predicted in this space a few months ago, expect more to
come. The floodgates have now been opened.
Thanks to some well-deserved publicity on the issue, the public now knows
that analysts are under pressure to keep favorable ratings on stocks to
boost investment banking and financial services business with those
companies. That was the main claim behind the Merrill case.
Frankly, most analysts aren't worth paying attention to anyway. Few of
them are capable of calling - or are reluctant to call - turns before they
happen, which is when the smart money is making its move. They wait until
the evidence hits them over the head to change their rating on a stock,
and by then it's mostly priced in to the stock.
But the most shocking thing about the Merrill case isn't about any alleged
conflict of interest, but about good old-fashioned asset allocation and
diversification. The investor in question turned $250,000 in Microsoft
(NASDAQ:MSFT) and AOL (NYSE:AOL) into $1.2 million, then switched that
money into InfoSpace (NASDAQ:INSP) and JDS Uniphase (NASDAQ:JDSU) in early
2000, just in time to lose more than 90% of that money. What that investor
was doing with all his money in two stocks is the real question for
investors. As we have stressed repeatedly, diversification and valuation
matter. The Internet has put a tremendous amount of power and knowledge
within reach of individual investors. Use it wisely and educate yourself.
And finally, the most interesting report this week could be Friday's first
look at second quarter GDP. Estimates range anywhere from a 1% gain to a
1% decline. Two consecutive quarters of negative GDP is the classic
definition of a recession, so it should be interesting to see where
Friday's report comes in. |
