We’re just a little bit more than a week into earnings season and already some themes have started to emerge from the numbers.
Nothing definite. Call them “tendencies.” But I’m finding connections among the results—and the investor reaction to the results that will be worth investing in whenever anything is worth investing in. (For when that might be see my post https://jubakpicks.com/2010/07/12/the-fuel-is-there-but-where-and-when-is-the-match/ )
No big theoretical drum roll. No grand theory of everything. Just some exploitable trends as I see them that are emerging from the second quarter earnings numbers.
- Corporate technology customers are buying—if the new product that they’re purchasing is so much faster, more efficient, and cheaper to run than the gear that they last upgraded before the recession really hit two years ago or so. I think that’s the lesson from Intel’s (INTC) earnings report this quarter. Sales of server chips rose by 170% from the second quarter of 2009. The new servers are so much more powerful and use so much less electricity that the payback on the investment—even if economic growth doesn’t pick up—makes the buy a no brainer. I think investors will see the same pattern when EMC (EMC) reports its earnings on July 21 and Cisco Systems (CSCO) reports on August 11. I already own shares of both Intel and Cisco Systems in Jubak’s Picks. I’m planning on adding EMC when the time is right.
- The market doesn’t like the shares of companies that are spending money now to invest in the future of their business. Google (GOOG) got hammered when it released earnings on July 15 because costs climbed in the quarter. The higher costs came from hiring and capital spending on data centers, both keys to the company’s fight to win share in the smart phone battle against Apple (AAPL) and Research in Motion’s (RIMM) Blackberry, and to push the transition of software products and services to cloud computing. Other stocks that might feel investor wrath on costs are Apple itself, which reports on July 20, and oil service technology leader Schlumberger (SLB), which reports on July 23. I understand why investors worried about a slowdown in the economy might decide to punish a company where costs are climbing, but when the costs are actually smart investments in future business I think the selling is short-sighted. I’d look to pick up shares of companies with the smarts and confidence to invest in themselves precisely because it’s so hard to make that choice right now. These companies are trying to steal a march on more timid competitors and you’d like to be along for the ride.
- And speaking of rides, how about buying shares of companies that are exporting to China? These exporters come in two flavors. First, there are the companies positioned to take advantage of the Chinese government’s efforts to increase domestic consumer purchasing and recent increases in wages across China. You could see some of that effect in Yum! Brands (YUM) earnings report on July 13, although the positive effects of growth in China were hidden by flat sales in the United States. Among consumer companies still to report, I think the most likely to show a China effect is Coach (COH), which is due to report on August 3. Second, there are the companies that are exporting the machinery that China needs in its drive to build infrastructure and to upgrade its domestic manufacturing base. German companies have been a major beneficiary. In the year that ended in May German exports climbed by 29% and, as you might expect with the European Union struggling to climb out of a recession, exports outside the European Union were a main driver, growing by almost 40%. A German company to watch is Siemens (SI). This export story finds an echo in Japan. Construction machinery maker Komatsu (KMTUY.PK), for example, has found relief from slow growth in its domestic market and in the United States in sales to China. Komatsu plans to double production in 2010 from 2009 largely on the strength of sales of China and Indonesia.
And it’s also clear from the earnings results so far that the earnings results so far leave some questions still searching for answers.
- Can China drive earnings growth for commodity producers enough to make investors happy? Earnings from Alcoa (AA), the stock that kicked off earnings season on July 12, raised the question rather than answering it. Alcoa surprised Wall Street by an extra penny a share and raised its forecast for growth in aluminum demand in 2010 but the stock has settled back where it was before the earnings announcement. The next test case will be Freeport McMoRan Copper & Gold (FCX), which reports on July 21.Copper and copper stocks track growth in the global economy even more closely than aluminum and aluminum stocks do. Depending on which consensus figures you use, the company is expected by Wall Street analysts to report either a small increase—about 8% in earnings per share–from the June 2009 quarter or to show a slight drop in earnings of 7 cents a share to $1.31 a share from $1.38. I’ll be listening to hear what Freeport McMoRan says about demand for copper in 2010 and watching to see if anything the company says about future growth makes any lasting impression on investors.
- We also don’t know if anxious investors place any value—and if they do how much—on earnings consistency. We’ll see a test of that when we get earnings reports from consumer goods stalwarts PepsiCo (PEP) and Coca Cola (KO) on July 20 and July 21, respectively. Johnson & Johnson, another company that shows solid earnings growth quarter after quarter, reports on July 20.
And lastly we now have some feel for the relative unimportance of earnings and the relative importance of government policy decisions during an earnings season where every investor seems to be looking for reassurance.
- JPMorgan Chase’s (JPM) solid earnings surprise on the morning of July 15, for example, didn’t move that bank stock or the financial sector as a whole as much as the news later that day that the Senate had voted to approve the financial reform bill and had sent it on the White House for signature. In fact, shares of JPMorgan Chase were down for much of the day and only moved into the black to stay on the news from Congress.
- That same day another sector, natural gas, demonstrated the same power of government to move stocks in the current market. Speculation, although it seemed to be informed speculation, reported that Senate Majority Leader Harry Reid (Dem.-NV) was planning to introduce a scaled down energy bill that would concentrate on clean energy and measures that would move the country away from oil—but that would not include any explicit effort on global climate change such as a cap and trade system for controlling carbon emissions. Speculation further suggested that the bill would emphasize natural gas as major alternative to oil. That was enough to move the price of a share of Chesapeake Energy(CHK) up .14% and a share of Ultra Petroleum (UPL) up 0.68%. Those moves don’t seem like much but both moves beat the market. On the day the Dow Jones Industrial Average fell by 0.07% and the Standard & Poor’s 500 index gained 0.12%. Chesapeake, one of the most financial leveraged of domestic natural gas producers, reports earnings on August 3. Ultra Petroleum, one of the lowest cost producers in the industry, reports on July 30.
- Some stocks and some sectors, however, seem impervious to any speculation about government action. Shares of SunPower (SPWRA), a member of the solar sector that has been so relentlessly crushed this year, after being crushed in 2009, fell even on news of the Reid bill, dropping another 3.5% on the day. SunPower reports on July 20. I wonder if anything the company can say will move the stock up against the extreme negatives surrounding the entire sector.
Earnings season runs hot and heavy until early August. I personally count Cisco’s earnings, reported on August 11 for this quarter, as marking the end of the season.
In other words, we’ve got lots more earnings data ahead to shift through in search of patterns that might bring order out of this confusing market.
nocnurzfred,
I think you misunderstood me. When I was referring to the “financials” on TQNT, I meant their financial statements/results.
Ed; My main financial is PBCT, and C to a significantly lesser degree. Planning on holding them until something happens. Have present buy orders in for HCBK & EMC.
nocnurzfred,
The financials are good (not great) on TQNT. And I think I would have targeted $6.50 as a buy price. However, it’s a solid buy.
mboyle27,
With low-priced stocks like NIV, you can afford to use the “house’s money” strategy, especially if you aren’t entirely certain of the sell price (because the stock is so undervalued).
For example, let’s look at NIV. If it has a price of $2.35 with a P/E of 3.58, it would have to get to a price of $9.85 to have the “classic” P/E of 15. What if I targeted $4/share as a sale price? If I sell 1000 shares, that gives me $4000, for about an $1800 profit. If instead I sell 750 shares at $3, and I sell the rest at $7, that nets me the same $4000, but with no risk on my initial investment (since I’ve already gotten that back).
What if the next earnings report comes out before I sell the last 250 shares, and the P/E drops to 2 at a $5 price? The stock would have to hit $37.50 to get to a P/E of 15. I might reconsider selling those 250 shares, especially if it is making a serious run at $37.50, where those 250 shares would sell for over twice what I paid for the original 1000 shares ($9375).
On the flip side, what if something horrible happens to the company after I made my initial 750 share sale? Let’s say it drops to $1/share before I can sell my 250 shares? That is still a $250 profit. It sure beats taking a loss.
Ed,
Thanks. I went along with you and took a small position at $2.18. Interesting strategy. I usually just get in and get out but i like your plan. Thanks for sharing!
Have accumulated 600 shares TQNT over the past couple weeks with cost basis of $6.78. Anybody else liking this one?
mboyle27,
I did! I got NIV at $2.22.
Right now, my plan is to sell 75% of my NIV holdings at $3 (that will retrieve my original investment funds). Then I am letting the other 25% ride to see how high it will go. In other words, all I will have in the stock is my profits. In gambling terminology, it’s called “playing with the house’s money”.
wsm – sorry but your exchange rate explanation does not hold water. If every share represents identical ownership and identical dividends then the price in a certain currency (such as US $)shoud be the same. If not, then arbitrage ( selling the high priced shares and simultaneously buying the cheap shares) would make it so in the blink of an eye.
I also wondered, like DanH, why the price difference and the only explanation I came up with is that London or better the UK government, does not charge the usual 15% dividend tax when paid to foreign investors (like US investors), while Australia probably does.
If anybody knows the real reason for the price differential I would like to know because BHP or BBL is on my watchlist in case commodities would for any reason take a dive.
Thanks in advance.
Hi Jim,
YUM looks great, except the debt: 6.85 leverage ratio. what’s up with that? How many stores are they planning to build in Asia?
Jim – Good analysis. I’m keeping GOOG for now and hope their increased spending leads to a future product or service that will move the needle profit-wise. Google has so many promising (or at least interesting) cloud-based products or betas but they contribute little to no revenue. Even Android doesn’t (currently) add nearly enough to impact earnings. Still waiting for their 2nd trick: Either Android grows up fast and Google is able to monetize it better, or it’ll have to be a future product.
Totally agree with Jim on the second point, buying stocks that get punished for longer term spending. This was one of the reasons I bought INTC when it was at the bottom (and reading Jim at the time taught me) and have a great paper gain on that purchase.
Ed,
Just wondering if you bot NIV at your target price? What would you be looking to get out at?
Thanks
wsm, thanks again.
DanH:
Billiton has dual-listing, in Australia and London. Tickers BHP (Australia) and BBL (London) are both American Depositary Receipts derived from those respective listings. If you look at x-rates over the last year, the USD has depreciated roughly 8% vs. the AUD and appreciated roughly 7.5% vs. the GBP. Additionally, the AUD has appreciated roughly 16.5% vs. the GBP. Hence, the ADR’s (denominated in USD) are worth more AUD’s and worth less GBP’s when priced in dollars.
Hello Jim,
off topic: you have discussed POT pretty often on this site; when do you pass on the JAM?
wsm, thanks for that link. Useful, but I still don’t see why BBL and BHP are priced so differently. I feel like I am missing something that is obvious to others –
OJunker,
Unless FLS starts a major upward move soon, you might be able to get it at $80 if you wait long enough. Otherwise, $86 might be the best price you might get. I’d suggest a nibble at $86, but save the bulk of your purchase for $80.
The financials look decent on FLS, although I can’t say I know enough about it to call it a buy.
trader,
I think there are emerging market funds that specialize in corporate bonds/debt. As for buying directly, I’m unaware of how to do it.
Off topic: Anyone. Do Chinese companys issue bonds? If so, anyway to invest?
Jim or Ed,
I am also interested in your opinion on FLS. I have been waiting to pull the trigger an buy some shares. Would $81 be a good point to buy?
Jim,
Off topic, could you provide an update on FLS?
DanH:
http://www.bhpbilliton.com/bb/investorsMedia/shareholderServices/plcQas.jsp#b
Off topic – I was wondering if anyone here understands the reason that BHP sells for more than BBL. As I understand it, they both represent the same ownership rights and future income stream. I don’t get it.
Theres allways light at the end of the tunnel, just have to keep walking