Avoid Earnings Reports like the plague! That’s what I promote in my book and DVD Series, Cashing in on Covered Calls. I stand by that premise for many reasons, the most important is the one that relates to the great returns I have been getting. But ERs do give us information regarding the overall economy, industires, and individual stocks we may want to add to our watchlist.
We are now well into the current earnings season and the results thus far are much better than analysts anticipated (holy cow, analysts can be wrong!). Pardon the Phil Rizzuto moment.
Overall, for the 2nd quarter, the earnings growth for the S&P 500 was -17.8%. On first glance, this does not look very positive but let’s examine the numbers a little closer. There are two extreme numbers incorporated into the -17.8% figure. First we have a very positive energy earnings growth of +26.4% for ENERGY. On the other end of the spectrum, we have an extremely negative EG of -85.3% for FINANCIALS and -23.9% for CONSUMER DISCRETIONARIES. Financials, as horrific as these earnings appear, are actually starting to show some stability.
Now, if we strip out the financials, the S&P earnings growth is actually up about 9%. If we eliminate both extremes, financials and energy, the S&P earnings growth is still up about 5%. Admittedly, this is below the average of 8% for the 2nd quarter but certainly not reason to panic.
Let’s look at the overall Earnings Report Card going from worst to best:
Consumer Discretionary- -23.9%
Consumer Staples- +4.9%
Health care- +8.3%
Ashwani Kaul, the Senior Marketing Analyst for Thomson Reuters is a well-regarded analyst relating to earnings and market conditions. “The numbers as a whole point to a pretty good earnings season”. He pointed out that the current earnings recession has lasted only 3 quarters compared to the one we experienced from 2001 to 2003. His firm, Thomson Reuter is looking for excellent earnings over the next 3 to 4 quarters with PE (price to earnings) multiples in the 12.5 area. More specifically, they are estimating EG for the 3rd quarter to be about 11.5%, 60% for the 4th quarter, and 22% for 2009. This bodes well for the stock market. Of course, there are no guarantees but put earnings in the asset column for stocks at this time.
When ERs are announced, they are compared to analysts expectations. This produces some surprises, both positive and negative. The scorecard on this front is a plus as well:
Positive surprises: 72.2% as compared to 69.9% in the 1st quarter.
Negative surprises: 23% compared to 26.7% in the 1st quarter.
Besides painting a positive earnings picture for the stock market, this information can also give us another reason to add a stock to our watchlist. For example, if a stock has a positive earnings surprise AND meets our system criteria, it should attract our interest. I’ve done some research and generated a list of some stocks that meet both requirements. Here they are along with the percentage of positive earnings surprise for the current quarter:
Last Week’s Economic News:
The economy is still striving to recover but is only enjoying minimal success. Consumer spending remains restricted due to rising food and gasoline prices. Tighter credit requirements are stiffling sales of new and exisiting homes. The one bright spot this week came from durable-goods manufacturers, which reported an unexpected increase in demand. This is a sign that companies are willing to invest in capital equipment despite the adversity in the financial markets this year. For the week, the S&P 500 declined -0.2% to 1258 for a year-to-date return of -13.4%. This is about 20% below the returns we would anticipate in an average stock market year.
The favorable picture painted by the ERs this earnings season belie the negativity so many of the experts have expressed about the resiliency of our economy. These reports , in my view, are foreshadowing an improvement in our economy which should turn into cash for us in the near future. For more information on Earnings Reports see pages 129-140 in my book, Cashing in on Covered Calls; Advanced Seminar II in my DVD and CD Series; and pages 83-92 in the Companion Workbook.
****Please Note: The ER dates listed in the free websites I present in my material may NOT be 100% accurate. Oftentimes companies announce an ER date and then change it as that date approaches. The alteration is not dramatic but can push the announcement from one contract period to another. The point is that an ER confirmation, by rechecking these sites prior to purchasing a stock or selling the option, is a good idea. This also applies to the ER date located in the IBD 100 charts as Bob pointed out in the comments link of my previous journal article.
I hope you find this information useful and look foward to hearing your comments and suggestions.