One in Five Companies Warning on Earnings?

All of a Sudden, Quarterly Corporate Earnings Are in TroubleTraditionally, the first big American public company to kick off each new corporate earnings season is Alcoa Inc. (NYSE/AA). For the current quarter, Alcoa reported a net loss of $178 million, or $0.16 per diluted share. The company stated it had some special restructuring costs in the quarter; if you were to exclude them, its corporate earnings were $0.09 per share. (Source: Alcoa Inc., April 8, 2014.)

As usual, investors grasping for any good news as a reason to push stock prices higher didn’t hold back. The chart below shows what happened as soon as the market for Alcoa shares opened after its corporate earnings release.

Alcoa Inc ChartChart courtesy of www.StockCharts.com

Alcoa’s stock prices gapped up almost five percent on its news that “it lost money but really didn’t lose money if restructuring charges were excluded.”

But how did Alcoa really do? The first thing I would do as an investor is see if sales at Alcoa are rising. In this case, Alcoa reported its revenue fell 6.5% in the quarter from the same quarter last year.

Then I would look at stock buybacks. Did Alcoa buy back any of its stock in the quarter that would have the effect of boosting its quarterly per-share earnings? Well, lo and behold, in the first quarter, the number of Alcoa’s diluted shares declined by more than five percent!

Please don’t get me wrong. I’m not saying Alcoa shares are a sell. In fact, I don’t follow the company at all. But when I see the stock market pushing the stock price of a company higher despite the company reporting a corporate earnings loss, declining earnings, and a stock buyback, I just get more concerned about stock valuations.

Dear reader, the party goes on until the punchbowl is taken away. We are seeing the signs of the party that began on key stock indices in 2009 ending soon. As of March 31, 18.6% of the S&P 500 companies have issued negative corporate earnings guidance for the first quarter. (Source: FactSet, March 31, 2014.) That’s almost one in five companies warning about corporate earnings!

If there was an investment theme I would follow as we hear from companies on the key stock indices about their first-quarter 2014 corporate earnings, it would be to be very careful and preserve capital. Market sell-offs can occur very quickly, and you don’t want to get in the way when they do. You want to buy investments when they are down and out, not when they are at their peaks.