Earnings season and other stock market wizardry
One quarter’s earnings aren’t the last word, but they tell us we’re still in a bull market, says this U.S. advisory, which also has a telecom buy.
A cartoon shows us two guys in an office, one standing, one sitting at the computer. The one at the computer speaks.
“I don’t get it — last time I jiggled the mouse this way we made a 16.45 per cent profit.”
The cartoon comes from The New Yorker, where the Wall Street cartoon is a work of art. It is borrowed by a U.S. advisory as a way of casing a wry eye on the fourth-quarter earnings season.
Companies will try almost any kind of wizardry to dress up their earnings reports. And the Street will use almost any kind of wizardry to interpret them.
With the recession receding “and the scars of the worst financial crisis in modern history still visible, how is Corporate America performing on the Profit and Loss statement?” asks The Primary Trend.
Mr. Barry Arnold publishes this advisory from his investment counselling offices in Milwaukee, Wisconsin. Scanning the results of the earnings race, he sees no reason to change his outlook.
He believes we have been in a bull market since last March and that we will continue to run with the bulls for some time.
He also has a fresh buy recommendation for his readers and we will check in there first.
Rewards along the way
Is there a more convoluted business than telecoms these days? Between wireline and wireless services, broadband networks and handheld devices, it’s not always easy to sort out the winners.
Mr. Arnold is convinced that Verizon Communications (NYSE-VZ) will be one of the winners. Created 10 years ago by the merger of Bell Atlantic and GTE, it has a market cap of $82 billion.
It has wireline service in 28 states and a wireless business that brings cell phone service to all 50 states and 20 countries.
The stock rode as high as $65 during the tech boom a decade ago, but has since settled into a more modest range. But this analyst likes it as an undervalued stock that will reward investors with income along the way.
The reward is not small — the shares yield better than 6.5 per cent on the $1.90 dividend.
Meanwhile, Wall Street believes that AT&T will dominate in iPhones at least through mid-2010. Thus any progress Verizon makes will be a bonus (the two are currently waging a fierce battle in U.S. TV commercials).
Verizon does, however, have the largest “footprint” in 3G or Third Generation mobile communications and will start rolling out its 4G service in 20 to 30 major markets later this year.
Not least, the CEO has purchased a large block of shares over the past nine months. And while earnings should be lackluster this year, cash flow is due to accelerate by over a dollar a share in the next year.
The stock has a “limited downside,” says the analyst, and excellent long-term total return prospects. It’s a buy up to $32 and trades at $29.
Baked into the cake
All in all, earnings season was a success on Wall Street. Over 70 per cent of companies “beat the Street” with their earnings and over 70 per cent came in with higher revenues than expected.
Mr. Arnold’s response to this is a qualified “So what?” He gives little credence to the results of a single quarter. For one thing, it’s too short to tell the whole tale. For another, it tells us what happened — and many times that is already “baked into the cake,” or reflected in the share price.
Still, he finds it interesting that the “paparazzi” on Wall Street kept warning that “an earnings recovery without any top line growth is too fragile and vulnerable and will disappoint.”
But he contended all along that the cost cutting and fat trimming would pay off when revenues recovered, helping earnings to explode.
What’s more, it has made companies behave better. “And their cautious outlook is keeping them fiscally restrained even as their revenues have rebounded,” he states.
There are several quarters of healthy earnings growth ahead of us, Mr. Arnold claims. In this case, the market has not fully priced in all of corporate America’s cost cutting measures.
The road to higher highs
The stock market may not be the bargain bin it was a year ago, this analyst admits. But it is hardly overvalued either.
The market stumble in January certainly did not change Mr. Arnold’s mind. Nothing goes up in a straight line, he says philosophically. “And if you believe, as we do, that we embarked on a new cyclical bull market last March, then the recent correction off the January 19th new recovery high is just a bump in the road to higher highs.”
As long-term investors, he adds, “we expect bull markets to encounter periods of selling that may take prices down by 10%.” This does not call for portfolio re-jigging, he insists.
As for the so-called January Barometer — “as goes January, so goes the year” — that is an old and tired adage. Those who used last January’s poor results as an indicator missed out on a very good year, he observes.
Remain bullish and buy on market weakness, Mr. Arnold tells his readers. We’ll leave him the last word. Tongue in cheek, he refers to the fact that the stock market often manages to rise when a National Conference team (the New Orleans Saints) wins U.S. football’s big prize.
“Wall Street wizardry makes for good conversation (and obviously fills space in investment newsletters), but it doesn’t always prove useful or profitable. We’d rather hang our hat on something more logical like the Super Bowl indicator, which is downright bullish this year!”
|
E-mail this article
Printer-Friendly
