Earnings scorecard: 4th quarter going the bull’s way
Corporate earnings growth is strong and a market correction creates opportunity for bulls.
The bears may be in charge for now with a market that is undergoing a somewhat painful correction, but ultimately the bulls will win this war.
Three quarters of S&P 500 companies have reported results, and with 4th quarter earnings crushing Wall Street estimates, valuations will ultimately rise if the trend continues. Or will they?
In response to fantastic operating performance at the end of last year traders have sent the S&P 500 to a decline of almost 5% in 2010.
So what gives?
Stocks have enjoyed an incredible run since hitting rock bottom last March. The market being forward looking appears not to care that 73% of S&P 500 companies that have reported earnings have bested estimates. (Check out these 5 earnings stalwarts)
The market is more concerned about what happens in the future and at the moment that future is clouded by things like foreign countries in Europe, mainly Greece collapsing under huge amounts of debt.
In addition the U.S.’s largest creditor, China is tightening the screws by putting the brakes on its own economy while making vague threats about liquidating its U.S. paper. That potential excess supply could make future deficit spending more expensive.
There is much noise in the system and it is hard to make heads or tails out of the minutia. Focusing on earnings then is a respite from the insanity. At the end of the day earnings do matter.
With earnings growing at such a strong clip, stock price appreciation typically follows.
Investors at the moment are skeptical of fourth-quarter results. According to Thomson Reuters data, the blended earnings growth rate for the S&P 500 is 207.6%. Impressive indeed, but that growth rate comes due to very easy comparisons.
Where the bears find trouble is with respect to guidance.
More impressive than the earnings growth and the number of companies beating Wall Street estimates is the number of companies that are raising guidance. On that front, for every 6 companies that are increasing estimates only 1 is decreasing the number.
With the Federal Reserve accommodating growth there should be no surprise that guidance is on the rise.
Interestingly the number of beats is coming from a wide cross-section of firms. Eastman Kodak (EK) reported earnings of $1.08 in the fourth quarter as compared to an estimate of $.18.
PNC Financial (PNC), demonstrating the success of operating with a steep yield curve, posted $2.17 per share. The estimate was for $.77. On the technology side Micron Technology (MU) beat earnings by 229%.
On the losing side of the ledger the companies reporting the largest misses came mostly from the energy sector. EOG Resources (EOG) was expected to post a profit of $.98 but reported a loss of $.39.
Kicking off earnings season was materials company Alcoa (AA). It was not a good start as the aluminum company missed by $.05, but that weak start was followed by beat after beat.
Investors can ignore the results of the fourth quarter at their own peril. Stocks may be trading lower given the noise from the outside. Trust me the world is not ending.
Strong earnings can and should continue in the first quarter of 2010. We can be certain of this given strong guidance and the easy money policy of the Federal Reserve.
I would use the current correction as an opportunity to buy growth at a cheap price. I like this list of 5 fast growing companies.
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Serious issues like drought and the deterioration of the developed world spell opportunity for this industry leader.
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