The Daily Dose: Looking for the Win

 | Feb 24, 2014 | 11:30 AM EST
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Earnings season has not concluded for me just yet. Over the next three weeks, I will put career on the line to say things that hopefully come true. It's a never-ending process because you are only as good as your next stock call in this business. Quick, can you recall in January when I said Wal-Mart (WMT) would issue a material earnings warning in February? Exactly.

But I do realize that your life is not congruent with mine and therefore, earnings season was through two weeks ago. Attention has now turned to the upcoming analyst conference circuit, proxy filing season where investors will complain about executive compensation structures and finding winners to hold into April earnings season.

Here are a few rules that I have concocted as to what you should be seeking in potentially winning investments from companies that only recently hit us with financial statements and guidance.

Sales comparison: Many global businesses from Wal-Mart to Coca-Cola (KO) had their top lines battered due to currency translation in the fourth quarter of 2013. Guidance ranges for FY2014 also incorporated sales risk from volatile currency conditions. In a basket of five to 10 companies presently on your "to research" list, drill into the core sales total and then calculate the quarter to quarter growth rates from 2013. If the percentages gradually strengthen, say due to new products, price increases, or expanding volume, draw a smiley face next to that name. This is a tedious process, but it must be done in a slow growth world where every corporate executive is claiming to be gaining market share from somewhere.

Gross margin composition: Favorable product mix and cost deflation would be music to my ears, coupled with lean inventory levels (below the pace of sales excluding currency). Stick a happy face alongside a company that attributes these characteristics. Should the company only be experiencing favorable product mix and cost inflation, draw a half happy face and then investigate management's outlook for costs on the earnings call transcript. Remember, benefits from favorable product mix fueling sales could be eaten alive via cost inflation.

Around the Horn

I get tons of questions. Below are the quick answers to some that continue to surface:

What Next?

An area I begin working on is post snowstorm rebuilding plays. I am seeing massive damage to roads across the country and even to lawns. A couple names to drill into off this theme would be Scotts Miracle-Gro (SMG). The stock has relatively underperformed following the company's recent earnings release. I don't feel as if the market is expecting much this spring, which is where robust lawn repair could surprise estimates. Another name would be Compass Minerals International (CMP) as towns are running low on salt supplies. I expect this company to play a role in stockpile rebuilding. The stock has been relatively outperforming of late, based on that stockpiling thesis.

Who is Eating Whom?

In businesses you could touch, otherwise known as the anti-Twitter (TWTR) and Facebook (FB), I haven't heard too much excitement on companies seeking to do deals of any kind. It's odd (and a bit disturbing) in that companies have the strong cash flow that should be put to work in areas outside of reducing shares outstanding.\

Why is this Group Lagging?

Dow Transports are stuck in a low gear while the market continues to stay afloat based on hope. I have no answer for this, except to point out that it's a red flag. (chart below)


 Source: Yahoo Finance

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we like this chart here, it appears ready to move higher. BOUGHT BZUN OCT 35 CALL AT 3.40
Large-cap, high-quality McKesson (MCK) is too cheap now, at $147.51 or so. The stock hit $243.60 more than 2.5...



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