MorningWord 7/19/16: Earnings Season’s Greetings

by Dan July 19, 2016 10:20 am • Commentary

For weeks now, financial journalists, blog writers, and tv pundits have been pointing towards Q2 earnings season as the true guidepost to what’s in store for U.S. financial markets in the back half of the year. I have been one of them. It’s been a confusing macro environment to say the least, so I can’t think of a better way of taking the pulse of the U.S. economy than listening to the outlook of hundreds of C-level execs, and the mood in which they deliver it. But before you make any overriding investment decisions, I think its important to be careful with a small sample size towards the start of the earnings season. In my experience extrapolating too much from one report, or a small sample too early in earnings season is a mistake and can set-up as a nasty trap.

For example, last night.  Netflix (NFLX), the best performing stock in the S&P 500 (SPX) last year (up 150%)  missed international subscribers estimates for the second quarter in a row and the stock is down 13% as I write (closed down 13% on April 19th after its last report). It’s now down about 35% from its all time highs made in December. Is there anything to extrapolate to Amazon (AMZN), Apple (AAPL), Comcast (CMSCS), Disney (DIS) or Time Warner (TWX)? Maybe on the margin, but not likely. And it’s important to remember that NFLX has been in outlier this past decade on a performance and valuation standpoint. What’s going on with NFLX is stock specific to them.

On the flip-side, IBM, has been one of the worst performing mega-cap tech stocks in the last couple years, down about 20% in 2013, 15% in 2015, but has recently caught a bid after making new 6 year lows in February, with the stock now up 38% from those lows.  The company reported their first quarter in more than a couple years that did not suck. The stock was up slightly this morning (it’s now down 1%). And that’s impressive considering it’s 17% rally in the last three weeks. But as far as bigger lessons? There is little to extrapolate from IBM’s results other than stabilization following a massive $28 billion, five year revenue decline from its highs in 2011.

So neither NFLX and IBM are telling us anything about Q2 tech earnings, and less about the U.S. economy, or the direction of the next 5 to 10% in the SPX.

But, for stock pickers out there, on NFLX we might be witnessing is a massive unwind of one of the greatest growth stories of the last 5 years, for a company that was at the forefront of a massive secular shift in media / tech of the last decade.

IBM’s resurgence in 2016 could be as much about investor’s desire for equities with yield, horrible sentiment, cheap valuation and the potential for some sort of corporate action than anything the company is doing specifically. All themes that are working in 2016, but don’t exactly speak to the next leg of economic expansion in the U.S.

I’ll reserve judgement on the health of U.S. corporate earnings after we get a wider swath, and I’ll generally exclude outliers like NFLX and (in the next week) companies like AMZN, AAPL & Facebook (FB) that trade on their own set of expectations.