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RoboStreet – April 19, 2018
Sifting Through the Early First Quarter Numbers
Markets are constantly in a state of sector rotation, always trying to anticipate the next rising trend of business momentum and this past week was no different. Every earnings season has a way of re-defining the current market leadership by either reaffirming its confidence in those sectors that led going into earnings season or by rapidly rotating into those sectors where unexpectedly good business conditions weren’t priced into the underlying stocks in those sectors.
It’s why I’m not a big fan of being fully invested going into earnings season. You just don’t know how Wall Street is going to react to a stock when company results cross the tape. A good example of this are the big banks, all of which reported top and bottom line results that beat estimates, but they all fell in price. Whether the stocks had priced in great numbers or the rising fear of an inverted yield curve that would pinch margins in the current quarter, no one knows, but the stocks have clearly underperformed on what was seemingly excellent news.
God forbid a company misses its revenue forecast. Shares of Philip Morris (PM), once considered a hallmark of the consumer staples sector, missed on the top line and its shares plunged by -17% yesterday. But how about a company like United Rentals (URI), an institutional fund favorite. The company well exceeds top and bottom line growth, OK’s a $1.25 billion stock buyback, provided stable forward guidance and the stock gets sold off by -6.3%.
Here, there seems to be no rational reason for the stock to take such a beating, but sentiment about construction and homebuilding slowing as interest rates are grinding higher has taken hold to some extent. The decision to ‘sell the news’ regardless of how good the numbers are for United Rentals is one of those market phenomena that unfolds when there is a barely noticeable shift in sector sentiment.
As of today, the S&P 500 is expected to report earnings growth of 17.3% for the first quarter. What is the likelihood the index will report an actual earnings increase of 17.3% for the quarter? Based on the average change in earnings growth due to companies reporting actual earnings above estimated earnings, it is likely the index will report earnings growth of about 20% for the first quarter.
While the majority of S&P 500 companies will report earnings results for Q1 2018 over the next few weeks, about 5% of the companies in the index (26 companies) have reported earnings results for the first quarter through April 12. Of the 26 companies that have conducted earnings calls to date, 15 (or 60%) have discussed a positive impact or expressed a positive sentiment about foreign exchange rates thanks to a weaker dollar.
All eleven sectors are reporting or are predicted to report year-over-year earnings growth. Seven sectors are reporting or are expected to report double-digit earnings growth, led by the Energy, Materials, Information Technology, and Financials sectors. How the market reacts to all this expected good news against the crosswinds of geopolitics is anyone’s guess, but if fundamentals win out, then we should see the market trade higher, but in a more volatile fashion than would seem comfortable for the average investor. Historically, earnings win out over other market forces and I’m of the view that history will repeat itself over the near term that covers the next several weeks.
Looking at what the market is most excited about from a pure price momentum standpoint, the energy sector is receiving plenty of attention. While none of the major oil companies have yet to report Q1 results, stocks of Chevron, ExxonMobil, Royal Dutch, BP plc, Total S.A. and a bevy of other energy stocks are in full-blown rally mode for two reasons. The price of WTI crude oil topped $69/bbl yesterday and year-over-year earnings growth are expected to lead all eleven sectors.
The Energy sector is expected to report the highest (year-over-year) earnings growth of all eleven sectors at 79.0%. The unusually high growth rate for the sector is due to both a significant year-over-year increase in oil prices and a comparison to unusually low earnings in the year-ago quarter. The average price of oil in Q1 2018 ($62.89) was 21.5% higher than the average price of oil in Q1 2017 ($51.78). Additionally, the energy sector is under-owned by institutions and thus is the target of accumulation that supports higher stock prices.
On the flip side, one company’s cautious comments can wreak havoc on an over-owned sector of the market, namely technology. Yesterday, Taiwan Semiconductor (TSM), the world’s largest contract chipmaker and a major supplier to Apple, revised its full-year revenue target to the low end of its earlier forecast. Apple represents nearly 20% of Taiwan Semiconductor’s revenue and the 6.2% hit shares of TSM are experiencing is having a big and negative ripple effect across the entire semiconductor space. The fear of a peak earnings cycle surfaced with this headline and certainly with Apple being such a huge component (14.60% of the Nasdaq 100), it’s stock price action carries a lot of sway as to the investor sentiment in the tech sector.
So, while the market sorts out the winners from the losers during the next couple of weeks when the majority of S&P companies report, investors can take comfort that the current up trend is in their favor. The Seasonal Chart below found within Tradespoon tools shows how the S&P is correlating better with its historic trend that favors a bullish April-May time period followed by a typically low volume trading range for the summer months which is followed by a strong fourth quarter.
Will the S&P 500 trade back up to challenge its all-time high of 2,872 from its current level of 2,682? Based on the fact that second quarter earnings growth is expected to exceed first quarter earnings growth, then yes, but I’m not so sure the market trades to new highs until later this year. With that said, just making another run at the previous high set in late February will represent a gain of 7%.
And if the market can accomplish that move by the end of May, it will provide a fine opportunity to book some excellent gains in our RoboInvestor Portfolio which is loaded with market leaders identified by my ‘always learning’ AI system. Having the right tools at your disposal takes the majority of the guess work out of wading through of what can be an earnings minefield for many stocks. My AI system helps to steer clear of trouble while highlighting what the market is most excited about on a daily basis.
We just added Amazon.com (AMZN) to the RoboInvestor Portfolio on April 16 with a cost basis of $1,441.60. Yesterday, while the Nasdaq was down by 80 points at mid-session, shares of Amazon were trading higher by 27 points, or 1.75% to $1,554 representing a gain of 7.83% in only four trading days as per our cost basis. That’s the power of a superior AI platform at work for managing a stock portfolio that outperforms the market averages. That’s the power of Tradespoon’s RoboInvestor.
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