Taking a Longer View of Earnings Season

 | Aug 01, 2014 | 2:00 PM EDT
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I made the mistake this morning of calling a good friend who is much more of an active trader than I. I got a quick response of "Waiting on payroll number. Call you back." And the phone was slammed down.

This scenario plays out all the time, as I forget how my trader friends are so focused on the minute-by-minute stuff and rudely call them to discuss matters at inopportune times. I had a mild interest is the payroll numbers this morning, but it was of more of an intellectual interest than anything else. None of my positions would be affected by the number in a meaningful way. I have parsed the report and will do a more in-depth read later on, but I was out walking the dog and communing with the local gators when the number was actually released.

This "Can't talk now, waiting for the numbers" phenomenon is more enhanced during earnings season. My trader buddies are so intensely focused on each and every number, as they have entered convoluted, nine-legged trades that are structured around the releases or have made bets that their guess about the analysts' guess is better than everyone else's. One options trader of my acquaintance has to go to a chiropractor every week, because he spends so much time hunched over the keyboard with his nose on the screen before and after the open and close every day as the reports come across the screen. Given that even the best of traders are not doing much better than I am over time, this seems like an awful lot of work and tension to me.

During earnings season, I track what is going on, and I spend a good deal of time reading reports, releases and 10Q filings, but there is no urgency to the process. I am more concerned about where the price of my stocks will be in four years than where they will be at the close of the day or month. The quarterly information is just a snapshot, much like the progress reports my 11-year-old brings home during the school year. It is very rare for a single quarter to show enough deterioration in the company's financial position to shake me out of the position, or enough improvement to send the stock price over my estimate of full value. It does happen, but it is rare.

My fondest hope each earnings season is that we get one of the massive blowups that put quality assets on sale at stupid prices. We saw that last year with some shippers such as StealthGas (GASS) and Star Bulk Carriers (SBLK), and earlier this year with Boardwalk Pipeline Partners (BWP), but so far this season we have had no really dramatic inventory-creation events. We have had some mildly disappointing reports that have caused enough lemming-like selling to create opportunities to initiate or accumulate additional shares of a few favorites.

Pretty much all of the natural resources and material names have had weak earnings reports, and the global economic recovery continues to merely sputter along. Resolute Forest Products (RFP) has slipped on the heels of earnings and is now back at just about half of book value. Arcelor Mittal (MT) disappointed the short-termers this morning and has pulled back this month to levels that offer a good entry point at less than 60% of book value. I thought Swift Energy (SFY) had a great report, but the market sold it off anyway, and the stock is trading at just 50% of book right now. Hercules Offshore (HERO) had a horrible report, and the stock is now at less than 70% of book value.

It is not just the materials stocks that are giving you a chance to scale into some cheap stocks right now. The market didn't really care much for the report form Campus Crest Communities (CCG) either, and the stock is back down to 76% of book with an 8.5% dividend yield. West Marine (WMAR) had a slower-than-expected start to boating season, and the stock is back down to just 76% of book value.

So far, we have had no huge blowups this earnings season that have created new opportunities for deep value types. However, some old favorites have slipped back down to levels where those with an eye on the stock price in five years or so instead of this afternoon's close might want to initiate or add to their positions. While my trading-oriented friends scramble and stress to make their money a penny or two at a time, I am more content to sit back and let value and time provide me with long-term returns that are measured in multiples of the current price.

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