Markets Asking a Lot from Blue Chips; Can They Deliver?

Wall Street Earnings are beginning to roll in and quite a few companies are missing Wall Street consensus.

This doesn’t mean, however, that there isn’t growth out there; only that estimates have so far been a little optimistic.

CarMax, Inc. (KMX) is a well-known used-car dealer. The company’s latest numbers were decent, but they came in below what Wall Street was looking for.

Fiscal fourth-quarter sales grew nine percent to $3.08 billion, which is pretty good. Comparable store unit sales grew seven percent in the fourth quarter and 12% year-over-year.

The company had to correct some accounting procedures related to extended service plans and warranties, and it took a hit on earnings because of this.

CarMax is buying back its own stock and just authorized another $1.0-billion repurchase plan that expires at the end of the 2015 calendar year. The stock only dropped marginally on the news.

Another company that missed consensus but is very much a growing enterprise is AZZ Incorporated (AZZ) out of Fort Worth, Texas. We looked at this company last year. (See “Things Are Looking Up! Let’s Hope They Don’t Wreck It.”)

This is a good business. The company manufactures electrical equipment and components for power generation and transmission. Management recently said that business conditions are improving and new quoting activity is noticeably stronger.

Fiscal 2014 fourth-quarter revenues came in at $180 million, compared to $140 million in the fourth quarter of 2013. Earnings were $10.2 million, or $0.40 per diluted share, compared to earnings of $13.2 million, or $0.52 per diluted share.

While the company actually missed Wall Street consensus earnings by $0.02 a share and missed on the revenue estimate, the stock went up after management reaffirmed its previous guidance for fiscal 2015. This is the theme we’re getting so far this earnings season.

So the numbers are decent, but not great. There is growth, but not enough so far to beat the Street. With this backdrop, the stock market shouldn’t really be going up. But then again, monetary policy is a powerful force and in equities, reality is about future earnings, not the present.

I’m very reticent to be a buyer in this market, recognizing, of course, that there are always opportunities in any market.

I think investors should be highly selective and focused on quality and value if they want to be buying a stock market that’s trading at its high. I view investment risk as having gone up because of the broader market’s action that has yet to produce a meaningful price correction since the financial crisis.

Earnings are still playing a game of catch-up with share prices. This is particularly the case in faster-growing, more speculative sectors like Bakken oil.

Some speculative fervor has come out of this market (initial public offerings and biotechnology stocks), and it’s a very good development for the longer-run trend.

Key stock market indicators like the Russell 2000 Index and the Dow Jones Transportation Average are confirming the market’s still-positive trend.

In order for the main market averages to accelerate meaningfully, blue chips will have to beat consensus—which is a tall order.