Market Dynamics Changing; Where’s the Upside for Investors?

Why Beating the Street Isn’t as Good as Real ValueBeing financial reporting season, it’s important to discern between results that beat Wall Street consensus and real economic growth.

Abbott Laboratories (ABT) just announced better-than-expected first-quarter earnings, but they weren’t better than the comparable quarter of 2013. Operating earnings, earnings from continuing operations, and diluted earnings per share were all down significantly compared to the first quarter of 2013.

So, the illusion can definitely become real in hot markets. Investors are always better off ignoring headlines and going right to the financial statements. Managed earnings are just that—managed.

One company that just produced a very good quarter was The Charles Schwab Corporation (SCHW). The stock broker’s first-quarter sales grew 15% to $1.48 billion on strong growth in asset management and administration fees.


Net earnings leapt 58% to $326 million, or 60% to $0.60 in diluted earnings per share. Top-line growth and strong expense control were the reasons for the strong bottom-line growth.

There’s no real reason why Charles Schwab’s share price should keep on appreciating near-term. All the good news is priced into the shares. The company beat consensus earnings by $0.02 a share, while revenues were in line.

This reporting season, earnings are here to justify current share prices.

I’d be very wary of buying corporate good news now. Market jitters aren’t going away and all it takes is a small catalyst for institutional investors to pull the sell trigger again.

A meaningful correction or price consolidation would be a positive development for the longer-run trend and a good opportunity to consider adding to blue-chip positions.

A good deal of speculative fervor has come out of this market, but by no means are biotechnology stocks or initial public offerings (IPOs) now cheaply valued. There’s a lot more room for meaningful downside so as to get back to reasonable pricing. It’s just indeterminate as to when this will happen with the Federal Reserve being so committed to easy monetary stimulus.

The NASDAQ Composite is leading this market currently and this means that there’s real potential for extra volatility. Wherever technology stocks go, so does the broader market.

The current environment is a great time to be re-evaluating portfolio risk as well as identifying those companies you’d like to own if valuations were more reasonable. I would still only buy genuine value in this market; the fact of the matter is that there’s not a lot of it around.

Equity market dynamics are changing. The beginning of last year saw tremendous leadership from transportation stocks and dividend-paying blue chips; then the rally slowly broadened out.

Speculative issues recently got a bit of a haircut and then there were gains in emerging markets. Looking for trends in the equity universe going forward, I suspect energy will continue to be a solid sector for investors. (See “Two Steps to a Solid and Profitable Portfolio.”) Despite recent gains, there is still value in the energy sector as earnings have done an excellent job of catching up to share prices.

The upside this year is with value plays. Price momentum might return to risk-capital sectors, but I think we’re in for an extended break now.