Earnings Update – What to Buy and What to Avoid this Week

Keith Fitz-Gerald Apr 24, 2019

If you’re uncertain about the investments you’ve purchased, not confident in what happens next, or if you’re simply not clear on how to make money in the markets, you’re gonna want to read today’s email.

Millions of folks were led to believe that earnings would stink this quarter, and that they’d be down a staggering 15.1% to an average negative 2%, the largest such decline in the five-year, ten-year, and fifteen-year averages.

Yet, that’s not happening.

The latest FactSet data show 78% of the S&P 500 companies reporting this quarter to date have reported positive earnings per share surprises while 53% have reported a positive revenue surprise.

Growth is averaging a positive 5-6% and the S&P 500 is within spitting distance of new, all-time highs.

Here’s how to cash in.

Trust the Right Numbers

The single most important thing you can do is trust the right numbers, which I’ll explain in a moment.

They’ll tell you everything you need to know.

This week is the busiest week of earnings season and we’re going to see a blizzard of figures with more than 140 S&P 500 companies scheduled to release their latest quarterly results including The Coca-Cola Co. (NYSE:KO), The Procter & Gamble Co. (NYSE:PG), and eBay Inc. (NasdaqGS:EBAY) just to name a few.

Heck, we already have.

Both Halliburton Co. (NYSE:HAL) and Kimberly-Clark Corp. (NYSE:KMB) came out of the gate Monday morning with stronger-than-expected results, as did Bank of Marin Bancorp (NasdaqCS:BMRC). Then, United Technologies (NYSE:UTX) posted better than expected figures early Tuesday as did – get this – Twitter (NYSE:TWTR) which stunned market watchers including me with 330 million active monthly users versus just 318 million expected.

I could take those or leave ’em, frankly.

For the most part, they’re broken brands in one way or another. Others are simply struggling to remain relevant under market conditions that really aren’t conducive to huge gains ahead.

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Keep an Eye on Big Defense and Big Tech…

You do, however, really want to watch these companies.

The Boeing Co. (NYSE:BA) – The company will report before the bell on Thursday, and that’s when we’ll get our first look at how significant an impact the 737 Max situation is going to have on earnings and, of course, guidance. Everybody “knows” there will be a huge downward revision particularly as it relates to cashflow; the question in my mind is how much. Frankly, I’m more concerned by recent revelations that the company may be prioritizing speed and delivery over safety and worker concerns. The stock could drop like a rock if even one of these points is proven, as opposed to alleged as was the case in a widely read New York Times article this past weekend. Buy on dips under $370 and consider hedging your downside risk with a Total Wealth Tactic like the “Married Puts” I wrote about last week.

Amazon.com Inc. (NasdaqGS:AMZN) – Team Bezos will also report after the bell on Thursday, and I think it’ll blow the doors off any concerns previously voiced about last quarter’s guidance. There are cues to be taken about the health of retail shoppers and consumer strength, but the real key is going to remain Amazon’s Web Services, something we’ve talked about frequently. News broke Monday that Apple Inc. (NasdaqGS:AAPL) spends something north of $30 million a month which means we’re talking $360 million a year. Apple’s already signed an agreement for $1.5 billion over the next five years which means that Amazon’s coffers are going to get considerably fatter as Apple ramps up services for more than 1.4 billion active devices worldwide. Here, too, you’ll want to buy and marry puts to your position as a means of protecting against any market shenaniganry. Better yet, consider a short term put option play to profit on a market induced dip that could take it to $1,823 or so. Then wade in. Or consider buying through one of the 26(f) programs I’ve highlighted in our paid sister service, the Money Map Report.

Microsoft Corp. (NasdaqGS:MSFT) – The company will report after the bell today (Wednesday) and big question here is how cloud computing will impact otherwise steady-eddy growth in legacy software sales. I am not certain we’re going to see anything earthshattering but then, again, I’m not looking for that. I’d be very happy with growth in the 9%-11% range. I am also particularly focused on guidance related to how the company will ramp up Azure – its cloud offering – to compete with Amazon. There seems to be a dividing line developing as bricks and mortar retailers like Walmart and Albertsons come on board to compete against Microsoft’s dominance. A fallback to the $119 area seems likely to me, but not because of anything Microsoft does; I simply think it gets swept up in broader hiccup and that’s when you make your move.

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…And Watch Out for These Landmines

At the same time, I see a few landmines that’ll catch unsuspecting investors by surprise.

Tesla Inc. (NasdaqGS:TSLA) – Team Musk will report Wednesday after the bell, and possibly even as you read this. The company is an unmitigated disaster which is why I expect the real focus to be on quarterly margins, how fast Tesla’s burning cash, and how likely it is – or isn’t – to reach 2019 shipment guidance. Musk’s tap-dance is growing tiresome to serious investors who are now openly questioning results, as opposed to simply following along breathlessly as they once did. Still, I think shares will pop if Musk pulls another rabbit from his hat and posts – gasp – a profit of $0.20 – $0.50 per share. That said, I think the company should be trading $100 below where it was Monday when I noted as much during an appearance on the Fox Business Network’s Varney & Co. Use any upside to “fade the trade.” or buy puts outright.

Facebook (NasdaqGS:FB) – The company reports on Wednesday, and I think we’re going to see strong numbers from active daily users, particularly outside the U.S. However, I still don’t think the company is worth the risk in light of looming regulation and growing hatred for the cavalier attitude it still seems to display. The other thing to consider is that the company is spending money hand over fist as growth decelerates, which creates the paradox of increasing revenues that may hit $14.95 – $15.00 billion and 25% year over year, a drop of the 30% from a year ago. Any short-term bump is an excuse to sell and move on.

In closing, trading action tells me there is still plenty of strength.

Watch the big names we talk about frequently for the simple reason that they’ll set the pace as we head into summer. I expect the markets to “split” between those companies critical to our future, and those that aren’t.

Buy the best and avoid the rest.

Until next time,

Keith

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