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RoboStreet – July, 26, 2018
Earnings Seasons Turns into Emotional Roller Coaster
Leading up to second-quarter earnings season, the stock market has been pulled and pushed by a slew of fluid variables ranging from currency fluctuations, tit-for-tat tariffs, gyrating oil prices, tightening Fed policy, foreign summits and upper-case Tweets. As if investors needed any more drama to keep them on high alert about the health of their portfolio’s, the parade of earnings reports crossing the tape is full of upside fireworks and downside trap doors and the market is making quick work of which stocks are the winners and which are the losers.
According to FactSet, as of July 20 the following metrics are in:
?Earnings Scorecard: For Q2 2018 (with 17% of the companies in the S&P 500 reporting actual results for the quarter), 87% of S&P 500 companies have reported a positive EPS surprise and 77% have reported a positive sales surprise.
?Earnings Growth: For Q2 2018, the blended earnings growth rate for the S&P 500 is 20.8%. If 20.8% is the actual growth rate for the quarter, it will mark the second highest earnings growth since Q3 2010 (34.1%).
?Earnings Revisions: On June 30, the estimated earnings growth rate for Q2 2018 was 20.0%. Eight sectors have higher growth rates today (compared to June 30) due to upward estimate revisions and positive earnings surprises.
The blended earnings (combines actual results for companies that have reported and estimated results for companies yet to report) growth rate for the S&P 500 for Q2 2018 is 20.8%, and the blended revenue growth rate for the index is 9.0%. During this earnings season, several companies in the S&P 500 have discussed rising costs during their earnings calls.
And remember we’re not talking about day-trading here. I’m looking for 50-100% gains inside of the next 3 months, so my weekly updates are timely enough for you to act.
Given this concern, it’s important to know what the S&P 500 is reporting for a net profit margin for the second quarter. The blended net profit margin for the S&P 500 for Q2 2018 is 11.6%. If 11.6% is the actual net profit margin for the quarter, it will mark a tie with the previous quarter (Q1 2018) for the highest net profit margin for the S&P 500 since FactSet began tracking this data in Q3 2008. Not bad, considering higher commodity inputs and wages.
The basis for the consistency of sequentially high-profit margins is directly related to tax reform. The reduction in the corporate tax rate due to the new tax law is a significant factor, as the lower tax rate boosted second-quarter earnings for companies in the index. It appears the lower tax rate is more than offsetting the impact of rising costs, resulting in a record-level net profit margin for the index in the second quarter. Even more impressive is that based on current earnings and revenue estimates, forecasted profit margins for the third and fourth quarters of 2018 are at 11.8%.
These data points underscore a bullish fundamental thesis for a market that should trade higher throughout the balance of the year, although not without the risk of some high-profile disruptions along the way. The trade impasse with China looks very real and long-term in nature. China is digging in and so is the White House administration. Also, in the mix is the Federal Reserve and their current dot plot plan that points to two more rate hikes this year, most likely in September and then again in December.
So, while from a fundamental analysis it appears as if the stock market rally should be represented by a broad-based move, the current earnings season is unfolding to be anything but. Certain stocks are gapping higher on spectacular upside surprises, which is expected while other companies that are beating estimates by more modest amounts are seeing their stocks get sold off aggressively. The market “tell” from this kind of tape action is that investor expectations coming into the reporting season were too elevated.
Case in point, Polaris Industries (PII), American-maker of powersports vehicles (all-terrain, motorcycles, snowmobiles, etc.) reported strong numbers that beat on the top and bottom line while the company raised forward guidance. One would think that such a glowing report would be met with a favorable response by the market, when in fact the stock tumbled by 14% in reaction.
And this is not an isolated case. All the aerospace/defense stocks have posted above forecast results and guided higher only to see similar selling on the news. It just proves out that without the right tools to help eliminate risk, earnings season can end up being a minefield for many investors. Thankfully, my AI platform serves as a beacon of light when there is low visibility of how certain stocks trade.
Within the RoboInvestor Portfolio we own UnitedHealth Group (UNH) at $240.68 as of April 30 and today it trades at $257, a very nice gain for less than 90 days. On July 17, the company reported terrific quarterly results that we met with a knee-jerk sell off that spooked many investors out of the stock. My AI platform confirmed to us to stay long and now the stock is challenging its all-time high with the Seasonal Chart forecasting a further rally in the stock in the days and weeks ahead.
There is no doubt that it greatly helps to have a system in place so when the ground does shift underneath, it can tell whether it’s just a tremor or a quake. Not only are Tradespoon tools providing a compass toward winning trades, they can also show seismographic downside visibility. And since fear is greater than greed, it only makes sense to have a defensively accurate mechanism in place that is working 24/7.
And remember we’re not talking about day-trading here. I’m looking for 50-100% gains inside of the next 3 months, so my weekly updates are timely enough for you to act.
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