The Day Ahead: Earnings Show Time!

 | Jul 09, 2013 | 8:00 AM EDT
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If you eat, sleep, and breathe the markets there is nothing more exhilarating than nailing a stock call and the natural insanity of earnings season. Here is a modified quote from Alec Baldwin in Glengarry, Glen Ross: "You need brass balls to survive earnings season."

As you probably know, it's show time on second quarter 2013 earnings season, and the moment of truth has arrived. All I can say is put aside your obsessions with QE tapering, or whatever it's being referred as these days, and start getting down and dirty.

Story 1: Fun with Financials

Regional bank stocks such as Keycorp (KEY) and M&T Bank (MTB) have been hot of late. The problem is that the massive runs and subsequent increase in expectations/valuation has turned the risk reward likely in response to second quarter earnings unfavorable. But, the financial sector continues to be of interest to me; it's just that I am in search of surprises.

Citigroup (C) shares have underperformed most of its competitors since its April 23, 2013 first quarter earnings release. While money has flowed into the aforementioned names, I think the market has forgotten how encouraging Citigroup's start to the year was in many areas.

Notable call outs were investing banking revenue, expense control, and finally, signs of true earnings power materializing and being sustained. With another low expectation backdrop on the company into the start of bank earnings later this week with an incrementally positive fundamental story at Citigroup may be rewarded. Wells Fargo (WFC) and JP Morgan (JPM) also report this week.

Story 2: Forget Alcoa, Smell WD-40

I can tell you from talking with clients that Alcoa (AA) is a hated stock. HATED! The number of stories of people losing money on this dog far outweigh when money was made. Did you buy this stock into earnings? Why? Look how it has traded into its last two earnings reports.

The real economic bellwether at the start of earnings season has become WD-40 (WDFC), I believe. That nasty smelling poison keeps all sorts of industrial machines operating properly. The stuff is increasingly used if heavy activity on machines is occurring (or, admittedly, if penny-pinching managers want to elongate the lifespan of a machine instead of placing new, expensive orders with a Caterpillar (CAT) or Terex (TEX). On this score, WD-40 struck an early positive tone for second quarter earnings season.

Of importance: Europe finally performed in line with internal and communicated plans; (2) China's economy noted as in a "slight decline", about consistent with data deemed untrustworthy; and (3) price increases on products and lower promotions fed a hearty earnings beat, which are classic signs a business is winning. Importantly, the stock reacted favorably to the beating of well-managed Street expectations than guidance that continued to incorporate downside risk to estimates.

Rapid Fire

  • Place your attention more so on Bernanke's three speeches in the next two weeks than the Fed minutes.
  • Barnes & Noble (BKS) CEO resignation was a long time coming. You want to begin thinking about a founder bid for the retail chain. The topic of lame management was something I had a chance to discuss here.
  • Second derivative names leveraged to housing recovery are separating themselves favorably from homebuilders.

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