Can We Make Money This Earnings Season?
The Dynamic Wealth Report
April 1, 2009
Two Ways You Can Profit From Earnings Season
Happy Financial Fools Day! I guess it’s really April Fool’s Day. But
some have renamed the day in honor of the bank bailouts, and the
general collapse of the financial markets. It’s been an interesting
morning already. I awoke to news of protesters at the G-20 meeting in
London. The sight is one to behold… thousands of protesters marching
around the city demanding blood for the financial failures.
Whether or not you side with the protesters, the pictures of thousands
protesting is amazing.
Of course all this protesting is focused on the G-20 meeting going on
right now. The meeting is in London and looks to be well attended by
the global leaders. Prime Minister Gordon Brown is in attendance as is
President Obama, French President Nicolas Sarkozy, and even Russian
President Dmitry Medvedev and Chinese President Hu Jintao.
These leaders are all tackling the big problem of the day, the global
recession and the banking crisis.
While these leaders search for a way out of the recession and the
protesters fight to be heard, I’m doing something different. I’m looking
for ways to make money in today’s market.
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And I have an idea.
As you know, earnings season is just around the corner. Alcoa is going to
kick open the floodgates with their earnings announcement on April 7,
2009. They, as always, will set the tone for this earnings season.
Unfortunately, I don’t think this year's earnings season is going to be
filled with happy days, kisses, and gumdrops. This year we’re going to
see a number of companies announce horrible results. The economic crisis
really hit hard in the fourth quarter of 2008 and I’m positive a lot of
that spilled over to the first quarter.
A number of companies have seen customers cancel orders. Others are
firing employees. Still, others have withdrawn revenue and earnings
guidance entirely. It’s ugly.
With that said, I think there are two opportunities to profit this
earnings season.
The first idea might sound counterintuitive, but give me a moment to
explain.
Sometimes bad earnings can be a good thing.
Remember, with most things in the market, news is relative. If a company
announces record revenue and earnings, but the analysts were expecting
even more, the stock can fall. The opposite is also true. If a company
does better than expected… even if the “better” is worse than normal, we
could see the stock rally.
I think that’s what’s going on now. Financial analysts are expecting the
end of the world. They’ve cut their estimates, then cut them again.
Their expectations are for many of these companies to be literally on
their death bed. And that’s good news for us.
See, with analyst expectations significantly lowered, it makes it much
easier for companies to beat estimates. And when companies beat
estimates their stock can rally.
Just look at Sears (SHLD). Back in January the company had an amazing
move in a single day. Let me set the stage. In 2008 the stock had fallen
more than 62%. Clearly the market knew retail sales numbers were down.
Then the company announced a decline in sales of 7.3%... horrible
results if you ask me.
However, the analysts were expecting a much bigger decline. The stock
rallied 23% right after the news announcement.
We recently witnessed the same thing with Tiffany (TIF). They did even
worse than Sears. Tiffany, just last week announced earnings plummeted
76%... because of the economy of course. Sales were down some 20% as
well. As you can see, these are horrible numbers.
The stock spiked more than 15% on the news.
So here’s the key. We need to identify when analysts have adjusted
expectations downward. Then we need to identify when analysts may have
gotten overly aggressive. Most financial web portals like MSN and Yahoo
list changes in analyst estimates.
In my mind, two areas that have been hard hit are the specialty
retailers and the restaurants. Now, a little revival in customer
spending could be a world of difference to these firms. Remember, home
sales ticked up slightly last month, and personal consumption has
remained stable.
There’s a wheelbarrow full of companies in this very situation. Two
companies I’ll be watching closely are Saks (SKS) and
Macy’s (M). Saks
has seen their earnings adjusted lower from a loss of $0.07 to a loss of
more than $0.28. And Macy’s has seen their earnings estimates fall from
a loss of $0.12 to a loss of more than $0.28.
It’s a risky trade, but one that could pay off handsomely if you get it
right. Take a look at some of the companies you follow, you might
uncover an earnings surprise or two.
Now, I know I mentioned two ways to profit from this earnings season.
Unfortunately I’m out of space today. Check back Friday, I’ll present my
other idea then.
• Corn (Over $4 per bushel)
Corn prices have now climbed above $4 a bushel for the first time since
early January. The US Department of Agriculture indicated an anticipated
decline in overall acres planted… a very significant data point for
higher grain prices overall.
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