Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Posts Tagged ‘earnings season’

The Stocks That Will Be the Highlight of 2Q14

By for Profit Confidential

Which Companies to Look to This Earnings SeasonEarnings season is always a great time of year to get up to speed on what corporations are saying about business conditions. The numbers are also useful in the sense that you can garner a lot of market intelligence regarding specific industries. And even if you aren’t interested in a specific company, brand-name earnings (or at least a summary of the numbers) can help hone your market view.

But it’s not just about how capital markets interpret corporate results. While earnings are managed, investors need to know if there is genuine sales growth taking place and in which market.

One trend that’s been evident for a number of quarters now is that many companies have been able to modestly increase their prices without materially affecting demand.

During the first-quarter earnings season, many corporations said that their operations in Europe were experiencing renewed vigor. It will be interesting to see if this trend continues this earnings season. Many times, quarterly results reflect one-time events or short spurts in either industrial or consumer demand that aren’t indicative of a new trend you can bet on.

Earnings reports are simply press releases in which companies put their best spin on what’s transpired during the quarter. The real news is the numbers themselves, and a company’s income statement and balance sheets are where I begin to look.

Also invaluable are U.S. Securities and Exchange Commission (SEC) filings, especially the Form 10-Q, which is a much more informative document. The numbers can still be unaudited in the quarterly filings, but not the Form 10-K, which is a detailed annual report that requires fully audited numbers…. Read More

Why This Institutional Favorite Tops My List of Stocks

By for Profit Confidential

Why This Company Is One Great Long-Term PlayOne of my favorite companies for long-term, income-seeking investors is Johnson & Johnson (JNJ).

While pharmaceuticals are the company’s anchor, its other business lines help with cash flow and dividend increases.

Investors have bid Johnson & Johnson shares tremendously in recent years, and it’s difficult to consider buying the company now, as the position is up another 10 points since March.

But Johnson & Johnson is the kind of stock income-seeking investors should keep an eye on for more attractive entry points, even though they may not come around all that often. The most recent possible entry points were in late September of last year and late January of this year.

My expectations for a mature company like this is for total annual sales to grow by the mid-single digits, with earnings growth and dividends producing an approximate 10% total annual return.

With a 10% annual return on investment, your money doubles every seven years.

Johnson & Johnson is typically priced at a slight premium to the S&P 500, but the company has earned its higher valuation by providing relatively consistent growth, reliable corporate outlooks, and a strong track record of dividend increases.

The company’s stock chart is featured below:

Johnson & Johnson Chart

Chart courtesy of www.StockCharts.com

Johnson & Johnson has typically been a good performer over the long term, but just like any large-cap, it can sit and produce no capital gains for long periods of time.

The position broke out at the beginning of 2013 after a number of years of modest capital gains. Institutional investors, wanting the earnings safety and solid dividends that the company provided, bid the stock … Read More

These Safest Names Still Offer the Best Returns

By for Profit Confidential

Same Old Trend to Continue Despite Improved Earnings NumbersThe earnings are beginning to flow and it’s a total mixed bag out there again.

Carnival Corporation (CCL) beat the Street with its second-quarter numbers, with cruise line sales growing four percent over the second quarter of 2013.

Guidance, however, was mediocre and the position sold off on its earnings results.

Walgreen Co. (WAG) has been very strong on the stock market over the last 12 months. The drugstore chain produced a six-percent gain in sales to $19.4 billion, and a 16% gain in earnings to $722 million.

But the company is getting squeezed both by health insurers and pharmaceutical manufacturers, so its business model is getting pressured.

Walgreen is considering reincorporating overseas to reduce its tax burden, but it won’t have details on any potential plan until later in the summer. The stock went up on the news.

Second-quarter earnings results were actually a bit better than expected and once we get into blue chip numbers, I think the market will be a bit more appeased.

It is important to remember where stocks are coming from. It’s been an exceptionally good last few years for equities; 2013 was outstanding.

The first quarter was a tough one, both due to the weather and general business cycle conditions. The market isn’t expecting second-quarter numbers to be strong, and that goes for both gross domestic product (GDP) and corporate earnings.

All that corporations have to do is meet or beat on one financial metric and either affirm or improve existing full-year guidance. With this backdrop, institutional investors will keep buying.

Monsanto Company (MON) soared to a record 52-week high after releasing a … Read More

A Hot Sector of the Market I Feel Will Soon Be a Buy Again

By for Profit Confidential

Why Action in 3D-Printing Stocks Is Healthy for This MarketEverything in the stock market experiences its own cycle of enthusiasm among investors. And this is especially well illustrated among speculative issues.

There was a time only a few years ago when some of the hottest speculative stocks were in solar energy. Now this small equity universe is still trying to rebuild itself.

And in more recent history, 3D-printing companies experienced incredible capital gains, only to experience incredible capital losses in what is a commonality among the market’s most speculative stocks.

At the end of the day, high-flying positions are still real businesses that have to deal with managing their own business conditions and hype among institutional investors.

As an investor, you have to consider both realities—the growth an underlying business is experiencing and the enthusiasm the marketplace has for such an enterprise or sector.

Twelve months ago, 3D Systems Corporation (DDD) was trading at $44.00 a share. Then it appreciated to a high of $97.28, before spending most of this year retreating to the $50.00-per-share level.

It’s only recently that the position broke the $55.00-per-share barrier, still sporting a forward price-to-earnings ratio of approximately 46.

Fervor for speculative stocks definitely diminished at the beginning of this year, and it’s part of the cycle that equities perpetually experience.

At the beginning of 2013, the breakout was in large-cap blue chips. Institutional investors had just started buying these stocks, and they led the broader market higher.

Then the NASDAQ Composite began to improve and actually took the lead for a while. But even with the Federal Reserve onside, it didn’t take too long for big investors to just book some profits. … Read More

What Do This Quarter’s Mixed Earnings Results Mean?

By for Profit Confidential

Market May Be Entering a New Cycle—But Don't Buy Just Yet!Oracle Corporation (ORCL) announced a quarterly revenue gain of three percent, but Wall Street was looking for more and the company’s share price retreated on its earnings results.

If it weren’t for the Federal Reserve, we probably would be in a correction, if not a consolidation, which has been the broader market’s go-to trend when it should have retreated further.

It’s such a mixed bag out there both in terms of economic news and corporate reporting.

While I think dividend-paying blue chips have the advantage going into the second-quarter earnings season, if the Federal Reserve wasn’t so extremely sensitive to Wall Street, this market would probably be a lot lower.

Even the Fed’s recent language is assuaging. If this market had to operate on its own (with free market interest rates and liquidity), things would be a lot different.

But this isn’t the environment we live in. Economic history clearly supports the scenario that it doesn’t pay to fight the Fed and that Wall Street will move mountains when it has Fed certainty.

Lots of investors bemoan the quarterly earnings cycle or game, but I don’t. I want to know a public company’s up-to-date financial results as frequently as possible.

While earnings are managed, over time, a business can’t manufacture success unless it’s a fraud (which, sadly, does happen).

Big companies have the operational leverage and the cash to keep boosting their earnings per share. Oracle’s latest financial results were uninspiring, and while recognizing that this is a very mature business with growing competition in the cloud, the position advanced a material 10 points since last June—this seems so overdone…. Read More

As Stocks Brush Off Geopolitical Tensions, Here’s the Catalyst for a Correction

By for Profit Confidential

Where's the Catalyst for Correction in StocksCountless stocks are bouncing off their highs, and in many cases, a lot of these companies are due for share splits.

It’s a peculiar environment for investors in that the main market indices are right at their highs, yet the Main Street economy isn’t performing anywhere near as well.

Stocks are a leading indicator and share prices move in advance of anticipated corporate earnings, but it’s so difficult to be a buyer when most stocks have already gone up like they have. It’s not boom time at all in the real world.

So with this backdrop, I think it’s fair to conclude that an investor has to be extremely careful in the current environment.

I view investment risk in equities as being high because stocks are at their highs and Main Street is stagnant. It’s not a good combination. And with the real possibility of rising interest rates later this year or early 2015, the boom that hasn’t happened could easily turn into a bust.

For an investor looking to buy stocks right now, I would say to wait until second-quarter reporting season begins and we get the latest numbers from corporations before investing.

This market is so badly due for a material price correction, and with the right catalyst, it could happen near-term.

Given the current information, I would view a material price correction as a buying opportunity. A real stock market correction has eluded us for too long since the March of 2009 low.

And while there was a small sell-off at the beginning of this year, stocks have been moving consistently higher for two straight years.

I … Read More

Top Tech Cycle Play with Even More Legs

By for Profit Confidential

Will This Company Make It as a Long-Term Cycle PlayOracle Corp. (ORCL) reports on Thursday and it’s one of the first large corporations to do so this reporting season. Second-quarter earnings season is just about here, and it’s exactly what the stock market needs now.

The lull between earning seasons can make for some wacky trading action. Often trading volume diminishes and from a business perspective, what you want from a company you’re thinking about investing in (or divesting) is its most recent numbers.

I thought that first-quarter earnings season was pretty decent, and I think companies will surprise the marketplace again for the second quarter.

A couple of trends that emerged in the first quarter was that European operations of large multinationals showed improvement comparatively, and that’s important for these super big companies that do business in developed markets.

The other trend was that currency instability held back corporate earnings. In many cases I read reports where the bottom-line would’ve been one to three percent higher if it weren’t for major devaluations in developing economies with large populations. Of course, this is an ongoing investment risk that any multinational is going to face and as an investor, there really isn’t anything you can do about it.

It will be worthwhile perusing Oracle’s upcoming earnings report; it’s the company’s fourth fiscal quarter of 2014.

Oracle is a company that I’ve liked for a number of years as an investment-grade equity security for long-term investors. But the business does experience periods of stagnant growth. (See “Another Earnings Season Suggests Another Quarter of Slow Growth Ahead.”)

I was enthusiastic about this position early last year as a long-term cycle … Read More

The Downside to Dow 20,0000

By for Profit Confidential

Where the Stock Market Could Head NextWith the Dow Jones hitting 17,000 being pretty likely in the not-too-distant future, from there, it’s only another 18% or so until the Dow hits 20,000, which is pretty incredible.

These numbers seemed so unrealistic just a few years ago but now, it’s not too farfetched. The most amazing thing to me is that stocks still haven’t experienced a material price correction since the financial crisis.

Stocks aren’t necessarily stretched in terms of valuation, especially with corporate earnings outlooks holding up for this year and going into 2015. What is stretched is investor determination with a market at its high.

Johnson & Johnson (JNJ) is a great company and a worthy long-term investment (see “Three Blue Chips Set to Drive Higher”), but it’s tough to buy stocks at all-time record-highs. In Johnson & Johnson’s case, the position’s up almost 20 points since the beginning of February, and this is on top of a previous 20-point gain in 2013.

One of these days, stocks are going to get walloped. But there’s got to be some sort of catalyst for it to happen.

The Federal Reserve can be a catalyst if it decides to suddenly change its outlook for interest rate certainty. The catalyst could also be a geopolitical event or something that comes out of nowhere, like a big derivatives trade gone bad.

In any event, there will have to be a shock that is perceived to have a lasting effect on capital markets.

In the lull between earnings seasons, which we’re currently experiencing, stocks reaccelerated on the back of very modest economic news and that in itself is … Read More

A Stock Market Break? These Indices Say No

By for Profit Confidential

These Turning Indices Show How Stocks Can Go HigherThe great monetary expansion is still alive and well and the effect on equity securities continues to be profound.

But what I find striking about the stock market’s continued advancement is that it’s blue chips that are pushing through to new record highs.

Speculative fervor in several sectors has diminished, but hasn’t completely disappeared. But it’s the big brand-name companies—a lot of which pay dividends—that just keep on trucking as institutional investors buy earnings safety and outlook reliability, and are betting on revenue and earnings acceleration going into 2015.

Union Pacific Corporation (UNP), a benchmark railroad stock, just hit another new record high on the stock market, breaking through the $100.00-per-share level. It was $35.00 a share this time in 2010.

And this from an old-economy, industrial enterprise that is probably not on many investors’ wish lists.

Amazon.com, Inc. (AMZN) broke down considerably at the beginning of the year when it was trading around $400.00 a share. It recently broke $300.00 a share, but has bounced back significantly and the position looks to be fighting hard.

And this is one of the speculative stocks on which investors booked their profits. This stock is on the comeback trail and so are Cisco Systems, Inc. (CSCO), The Priceline Group Inc. (PCLN), Oracle Corporation (ORCL), Apple Inc. (AAPL), and Google Inc. (GOOG).

The stock market has been digesting continued mediocrity in domestic economic data and slightly more positive numbers from China. Institutional investors are buying. I think that, in the absence of some kind of shock or new catalyst, the stock market can slowly keep grinding higher. It could very well turn … Read More

Rising Earnings Estimates the New Catalyst for Stocks?

By for Profit Confidential

Where Street Estimates Pointing 2015No doubt, trading volume for a lot of stocks has been on the decline, and while this is traditionally a sign of a market that’s topping out, this potential outcome would be well-deserved and no surprise.

It’s the lull between earnings seasons and the beginning of summer trading action. Volume is going to be lighter, and stocks are due for a correction—even a big one. So I don’t think this market is running out of gas; it’s just tired and investors are looking for catalysts.

Following earnings forecasts, old-school technology stocks like Microsoft Corporation (MSFT) and Oracle Corporation (ORCL) are seeing their estimates going up for 2015. And Wall Street’s even nudging estimates for the financials higher.

Even if stocks are tired and volume is declining, rising estimates for next year is a positive trend.

As most blue chip corporations did OK in the first quarter of 2014 (see “1Q Earnings Not Giving the Market the Boost It Needs”), one commonality among many multinational companies was improving business conditions in Europe. It will be very interesting to see if this trend holds during second-quarter reporting. If it does, it increases the likelihood that multinational businesses will see their 2015 earnings estimates nudged higher yet.

Street estimates for Caterpillar Inc. (CAT), which is a very international business, have been going up across the board for this year and next. While the market expects total sales to be basically flat in 2014 (compared to 2013), current consensus is for around six-percent sales growth in 2015.

And there’s a similar scenario with other Dow Jones stocks like Cisco Systems, Inc. (CSCO) … Read More

Why the Old Adage “Sell in May, Buy Back in October” Could Make Extra Sense This Year

By for Profit Confidential

How to Make Use of Your Holdings if Stocks Drift SidewaysAfter some bouts of selling in May, the stock market appears to be edging higher again as we are at the end of the trading month today.

As I said in January, it will not be easy to make money this year, given the cuts in easy money flowing into the capital markets. The S&P 500 is leading the pack with a 3.46% gain as of Tuesday. If you annualized the five-month return, the advance comes out at 8.3%. I expected to see the index advance about 10% to as much as 15% this year, so we may be lucky to reach the lower estimate if the stock market can manage to move higher. (Read about some dividend-paying stocks to boost your returns in “Five Dividend-Paying Stocks for When the Market Slides Lower.”)

Growth stocks, which were the Wall Street stars in 2013, are now the dogs of Wall Street, as investors shift their capital into lower-risk big-cap stocks. The NASDAQ is up a mere 1.45% this year, while the small-cap Russell 2000 is languishing with a 1.86% decline.

Now keep in mind that we are currently in the worst six-month period for the stock market from May to October, based on historical tendencies.

This doesn’t mean there’s no hope for the stock market going forward, but again, it won’t be easy. May is looking to produce a positive advance, so there’s some optimism.

What I think will likely continue to happen is the stock market will tread cautiously in the absence of any fresh new catalyst to entice investors to buy in.

We are entering into the … Read More

This Stock Poised to Impress Long-Term Investors

By for Profit Confidential

Nike Company Poised for a Very Good QuarterIf there’s been a rotation into safer, more reasonably priced stocks, the trend can also reverse itself when the market is ready.

Biotechnology stocks, initial public offerings (IPOs), and hyper-priced technology issues were ripe for a sell-off after such tremendous capital gains. A rotation isn’t a breakdown in the longer-term stock market trend; it’s just a trade, and big investors wanted to book some profits.

Now some very good companies are more attractively priced, and there could very well be some decent buys if the broader stock market’s current fundamentals aren’t hit by some external shock.

The action in this market is choppy, and it’s the lull between earnings seasons. The lack of corporate reporting often makes for tough trading in stocks.

One company that I like for long-term investors, however, has come off its high by about 10%. The stock I’m talking about is NIKE, Inc. (NKE).

NIKE has a long track record of relatively consistent wealth creation for shareholders, and the company pays a dividend. Its current yield is approximately 1.3%.

According to history, this position has proven to be a good buy when it’s down. According to management, its business prospects for the rest of the year are solid. The company’s long-term stock chart is featured below:

Nike Stock Long Term Growth

Chart courtesy of www.StockCharts.com

Wall Street firms have been increasing their earnings estimates for NIKE going into 2015.

The company’s most recent quarter (ended February 28, 2014) was a good one. Total sales grew 13% to $6.97 billion, while diluted earnings per share from continuing operations grew four percent to $0.76.

Global footwear sales provided the biggest quarterly gain, jumping … Read More

After 1Q14, Are Business Conditions Improving?

By for Profit Confidential

1Q14 Looking Good ContinueIt’s still earnings season and countless businesses are reporting their financial results.

Echoing the strength in the auto manufacturing sector, American Axle & Manufacturing Holdings, Inc. (AXL) announced double-digit growth in its sales and bottom line.

As a leader in driveline and drivetrain systems for light trucks, sport utility vehicles (SUVs), and cars, the company’s first-quarter sales grew 14% to $859 million, with non-General Motors Company (GM) sales leaping 53% over the first quarter of 2013 to $289 million.

Citing much-improved sales for the “Jeep Cherokee” and “Dodge Ram” full-sized trucks, management expects a strong year. (See “Five Reasons This Tech Stock Tops My List.”) The company’s content per vehicle grew 10% to $1,655 and earnings improved 360% to $33.6 million.

And good numbers aren’t just related to the auto sector; The Estée Lauder Companies Inc. (EL) just hit an all-time record-high on the stock market after beating the Street on revenues and earnings; the company also increased its earnings-per-share (EPS) forecast for the year.

Announcing results for its third fiscal quarter (ended March 31, 2014), the company’s sales improved 11% over the same quarter last year to $2.55 billion.

The company said it experienced solid growth in all its operating regions, as well as margin expansion, which resulted in a 19% comparative gain in quarterly earnings to $213 million.

The numbers beat management’s own expectations for the quarter, and the company produced double-digit growth in all five of its main operating categories with the exception of hair care products.

In local currency, all of the company’s operating regions, being the Americas, Europe, the Middle East and … Read More

How Past Investment Trends Predicted This Stock Market Action

By for Profit Confidential

Speculative Fervor Declines on Growing RiskIt’s just the same old story with stocks. One day they’re up; the next day they’re not.

If 2013 was a breakout year from the previous long-run recovery cycle, 2014 is a year of choppiness.

Stocks just can’t seem to latch onto any particular trend. A convolution of influences from earnings results to geopolitical events continue to beat down what positive sentiment sprouts from the data.

It’s no surprise to have choppy capital markets after such a strong year of capital gains. And that’s the thing I always try to keep in the back of my mind: stocks are about the future—a future stream of earnings discounted for every potential eventuality at prevailing rates of interest.

With downside leadership in equities provided by the high-valuation large-cap technology stocks, it’s difficult to imagine the main market indices accelerating near-term, especially as the marketplace has already voted on this earnings season.

A familiar mantra coming from a lot of Wall Street analysts is that the pace of U.S. economic activity should accelerate towards the end of the year. Several firms are calling for stronger oil prices and lower gold prices accordingly.

But if the choppy action in stocks so far this year is any guide, things are unlikely to unfold as expected. And the catalyst for downside is unlikely to be due to corporate performance or the Federal Reserve. Companies are expecting to meet existing guidance, and the central bank continues to provide a stable low interest rate environment.

Geopolitical events unfolding between Russia and Ukraine are a growing risk for investors. A “sell in May and go away” type of … Read More

Creation of Wealth Driving Airline Sector Higher

By for Profit Confidential

Top Stocks Highflying Airline SectorThe Boeing Company (NYSE/BA) has proved that the airline sector is continuing to progress after the stock easily beat on both its revenues and earnings in the first-quarter earnings season.

Strong wealth generation in the emerging markets in China and Asia are a major factor for the airline sector’s growth. Add in the global economic renewal, and you have an increased demand for air travel. The growth in Asia is particularly strong and will help to drive up the demand for capacity and routes, which will translate into more planes needed.

The airline sector was nearly dead following the tragedy of 9/11, but it has since made a steady recovery. In fact, the airline sector is on target for its second straight year of higher profits, according to research by the International Air Transport Association (IATA).

IATA suggests that North America will hold onto its title as the biggest airline sector market worldwide, with expected profits of around $8.6 billion in 2014. In second place will be the Asia-Pacific airline sector, earning about $3.7 billion; and Europe is expected to come in third with an estimated $3.1 billion. (Source: “Industry on Track for Second Year of Improving Profits – Rising Fuel Costs Largely Offset by Increased Demand,” International Air Transport Association web site, March 12, 2014.)

The evidence is reflected on the chart of the Dow Jones US Airlines Index below, which shows the steady uptrend since November 2012 and a bullish “golden cross,” based on my technical analysis.

Dow Jones US Airlines ChartChart courtesy of www.StockCharts.com

While Boeing is one of the top plane makers as far as wide-body jets, I also like … Read More

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