Watching EPS Estimate Cuts

 | Jan 11, 2014 | 5:00 PM EST
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The miss from Alcoa (AA) is a reminder that we are entering a risky earnings period.

There were fewer preannouncements than usual, it seemed, although many names offered lower 2014 outlooks before Christmas, which is usually just as bad. For long investors, an earnings miss can be the kiss of death for a stock, so they should be avoided at all costs.

I use recent cuts in earnings estimates as a distant early warning system, which causes me to double check my thesis and look for any flaws in the names I own.  Cuts don't guarantee a miss, but clearly evident weakening in the business prospects -- which would cause analysts to cut numbers -- are a precursor to further pain.

The table below shows larger-cap stocks (more than $500 million market cap) that have had EPS estimates cut more than 20% since mid-December. These are candidates for a double check if you own them. The cuts do not guarantee a miss, and many names will miss that have no cuts, but this is as good a starting point as any to scrub your portfolio for risks.

Two names stood out to me. Ford (F) has been a darling, and everyone seems excited about the auto cycle. I wonder when rising rates are going to bite into demand, especially since this cycle is being driven by the return of subprime loans.  The stock is holding up, but numbers are starting to be cut. I would study this one hard before owning it.

Sanderson Farms (SAFM) is also seeing an uncomfortable divergence, with estimate cuts flying in the face of a rising stock price. SAFM reported quarterly results in December and noted that higher chicken prices were supportive to results. But more recently, analysts are getting cautious. This is another to dig more deeply into if you own it.

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