The Day Ahead: The Disasters Are Coming

 | Apr 22, 2013 | 8:00 AM EDT
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Being a stock-market junkie is fun, if not necessary, for success in this business. While mere mortals follow the crowd in order to achieve their level of desired mediocrity, I've always believed that the best market insights are invisible to the untrained eye. "Geek stats" create a powerful backbone for any investment thesis. The problem is that these stats change with every single session, and an interesting figure or number Monday may be old hat come Wednesday. This is especially so at the moment, with the rapid and potentially damaging changes we're experiencing in the market. Let me just say this: Blowups are coming this earnings season, no matter the seemingly soothing words of perma-bulls.

Geek Stats on Earnings Season

To my knowledge, we have not seen that single eye-poppingly good earnings report that sways sentiment back to more positive than negative. Full-year guidance boosts are only capturing first-quarter beats that, in numerous cases, include a gamed tax rate. I don't like the earnings quality on display thus far. Moreover, this tendency to beat and push guidance in line with consensus is simply not where cash-rich companies should be at this stage in a global recovery.

Grow a spine, CFO. Reward your shareholders today, because life is too short. The acceptance of mediocrity discourages investors.

With all that in mind, you should be keeping a list of the companies with early-to-mid-June investor days that could serve as catalysts for the stock. Should the market sell off in May -- after losing ground in April -- a company with an intriguing investor event could be had a cheaper price before the fact. Under Armour (UA) is a prime example. Its investor day is scheduled for June 5, and I anticipate that management will convey a comprehensive long-term plan that will include robust international expansion. (#HotStat: A mere 6% of UA sales are derived from international operations.)

Remember that companies will not have the benefit of input-cost deflation forever. In the first half, for instance, apparel companies continue to benefit from cotton-cost deflation. That will transition to less of a tailwind in the second half, thus making comparisons tougher. It's critical to analyze whether a company is achieving favorable results in ancillary margin line items -- i.e., pricing, transportation and so on.

Finally, be a peach and do the inventory turnover calculation for the last four quarters. If a company has failed at improving inventory turns in an accelerated quarter against a global growth story, that company is a possible future disappointer. The common theme here is that troubled European countries weakened further midway through the first quarter, and inventory turns subsequently slowed.

Quick Shots at Upcoming Reports

AK Steel (AKS), U.S. Steel (X), Terex (TEX), Caterpillar (CAT): I'm seeing dreadful, dreadful charts on all of these names. The signs point to very reserved comments on China. Negative stock reactions would be disturbing to me, given the descent of the stock prices in these industrial-related companies.

Brinker (EAT), Panera (PNRA), Yum! Brands (YUM), Cheesecake Factory (CAKE), Dunkin Brands (DNKN), Starbucks (SBUX): Something shifted in the U.S. economy in March vs. February, and these earnings reports will be helpful in determining whether sequester effects are weighing on consumers. You'll want to zero in on Starbucks' U.S. store traffic trend on a sequential basis.

D.R. Horton (DHI), Lumber Liquidators (LL), Owens Corning (OC), Whirlpool (WHR): Dented homebuilder confidence amid higher labor and materials costs have weighed on the pure play homebuilders. Theoretically that should be favorable to the margins of Lumber Liquidators, Owens Corning, and Whirlpool, since it sticks builders with higher prices into a demand rebound.

Arkansas Best (ABFS), UPS (UPS): Are FedEx's (FDX) issues limited to FedEx, or are there broader industry challenges?

Simon Property Group (SPG): I'm interested in management's J.C. Penney (JCP) comments.



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