As one TradingwithCody subscriber put it last week, “This earnings season has a lot of revenue misses and poor outlooks. Feels like things are getting better but this does not jive. Thoughts?”
My response: “The real question for stock investors and traders is whether next year’s earnings for the S&P 500 will be another set of record profits. Despite how badly the economy has been for Main Street, we’ve been right for the last four years that the big corporations would report record profits. And the market has gone up big time. Europe’s definitely having a drag on most big companies right now, but there will be a lot of stimulus and new corporate welfare and new targeted tax tricks and endless 0% interest rates for big business and banks for at least a couple more years.”
In other words, the big picture hasn’t really changed. And neither has our strategy. We do intend to take a closer look at a couple of names that whiffed this quarter, but the overall playbook remains on track. Here are some details on a few of our holdings:
Apple: Apple beat (lowered) expectations for the top line and iPhone sales, but its net income per share missed and its guidance for the fourth quarter was well below analyst expectations. The shares slid below $600 initially after hours Thursday, before trading back up to where it had closed. The stock bounced around some more Friday to close at $604/share—more than $100 and nearly 15% below the high set just about a month ago. Much of the weakness had come pre-announcement, as investors caught the Google flu and also had concerns about the $329 price point on the new iPad Mini. I’m not sure the market is right about that, as margins and earnings will be huge and $329 is probably cheap enough to bring in most of the folks who were considering a crappy $199 Android tablet.
As I wrote earlier this month, Apple’s “margins are likely to be a bigger factor in the company’s upcoming earnings growth, as there’s still room for margin expansion over the next couple years. Feet to fire, I expect a slight miss on the quarter relative to consensus expectations but that the stock could rally back over $750 by year end.”
Nailed that one, and clearly most of the bad juju was already baked into the share price, as bargain-hunters swarmed on the initial sell-off. Holding strong and still looking for a holiday sales rally into year-end.
Facebook: From my post in early October: “I think FB simply needs to meet topline and bottomline consensus estimates and any hint of improved monetization of mobile users would pop the stock.” Sho nuf, mobile advertising revenue beat expectations and the stock popped 20%+. I’d expect this trend to continue—remember, smart phone penetration isn’t anywhere close to where it will be in a few years. And more eyeballs will mean more ad dollars for Facebook.
Fusion-IO: FIO beat big time but guidance was a bit softer than what the analysts had expected. This note from a JP Morgan analyst was right on: “We recommend that investors take advantage of any near-term weakness in shares of Fusion-IO. The company delivered solid Sep-Q results and was the first company to beat numbers across the board in our coverage list.The company’s usual conservatism is on display with the Dec-Q guidance, in our view, but we think that there is upside potential. As a result, we see any near-term pain in the stock as a buying opportunity for long-term investors.”
3D Systems: DDD beat and then raised forward guidance by a good bit over the Street’s consensus. Very impressive quarter, frankly. Stock is cheaper now than it was pre-release because estimates will have to go up.
F5 Systems: Soft on the quarter and soft on guidance and the market hates it. This stock has long been expensive and with the huge sell-off on just a bit soft numbers, it is finally getting cheap. That said, this one goes in the penalty box like Juniper. More analysis and homework is due.
Google: Google accidentally reported earnings before the close on October 18th, and the numbers weren’t good. The company reported third quarter earnings of $9.03, well below the $10.65 that analysts were expecting and off 20% from the prior year quarter. Although advertising revenue increased 16% and paid clicks surged by a third, Google’s new Motorola handset unit lost $151 million, or 6% of the unit’s revenue. After trimming down repeatedly up higher, I added to my Google position at just under $680 this week. Nothing shocking or long-term threatening, just a report that disappoints all those newfound/weak-handed bulls who were plowing into the momentum of this thing after it crossed $700.
Amazon: A poor performance at LivingSocial.com and big investment in future growth led to Amazon’s first loss in nearly a decade, but the stock rallied after an initial nosedive. Let’s face it—who doesn’t do their Christmas shopping on Amazon? I think the shares keep creeping upward into year-end despite the loss. Amazon’s evolving platform of hardware and services continues to impress and while the shares may be volatile, we’re taking a longer-term stance on this one.
Sandisk: The company beat expectations and indicated that its outlook was strong, but a battle of the analysts, including a downgrade last week (not to mention a very weak market overall), kept the share price at bay in subsequent trading sessions. Holding steady.
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