The Daily Dose: Look for Vital Events

 | Aug 06, 2013 | 9:00 AM EDT  | Comments
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The number one thing to watch for in a steadily climbing stock market is an important event, macro or firm-specific, that goes overlooked.

I have lost count the amount of times a truly negative event ultimately signaled a spate of bad news for stocks ahead. So while you get Amazon (AMZN), Bezos, and Washington Post (WPO) takeover conspiracy stories shoved down your throat, be informed that this development is completely irrelevant to your financial life. The bald guy is a secretive billionaire that wants to spread his sphere of influence, creepily learn more on consumers for the benefits of the company he founded, and look way cooler at the dinner parties he attends. If anything, his dumping $185 million in Amazon shares to buy Washington Post indicates he is calling a top in that absurdly overvalued name, as I kindly noted on Twitter Monday evening 

In my eyes, the most pertinent news that has implications for your portfolio (which is probably overweighted in consumer discretionary stocks) is the material second quarter earnings warning from teen retailer American Eagle Outfitters (AEO). Its new earnings-per-share guidance is $0.10 vs. previously articulated $0.19-$0.21. I launched coverage on competitor Aeropostale (ARO) with a sell rating for my company Belus Capital Advisors (happy to share the report, send an email!) in late July, so the warning is fine and dandy to this fella (stock traded lower in sympathy).

What made American Eagle's warning alarming is that thus far in 2013 it had been operating quite well. It had continued to feast of Aeropostale's miscues and to benefit from a general affinity for greater trend in both men and women's attire. This is the first black eye quarter for American Eagle's still fresh management team and the individuals hired behind the scenes to replace a long-time, outgoing product designer. Look at the components of the shortfall:

  • Weaker than expected sales.

Analysis: confirms my reads of soft post July 4 mall traffic despite higher stock prices...also confirms cautious tone struck by the majority of casual diners on their 2Q13 earnings calls.

  • Weaker than expected margins.

Analysis: red flag for an industry that is poised to cycle benefits of cotton cost deflation, have they run out of "buckets" (useless sell-side jargon term I wanted to dust off) to trim costs?

  • A highly promotional environment was indicated.

Analysis: suggests a higher than planned promotional environment for back to school season.

  • Sales sluggishness intensified as July progressed.

I would refrain from stepping in on weakness with respect to American Eagle. Inventories are clean, but there is little sales momentum heading into that second most critical selling period of the year leaves me concerned on how the company's third quarter earnings guidance will be conveyed later this month. Why be exposed to a near-term headache in a bullish broader market?

The Bottom Line on Disney

You are NOT buying Disney's (DIS) stock in the hopes of the company announcing a blowout second quarter earnings figure. If you are thinking along those lines, it's the wrong approach, contact me and I will help. Bob Iger's re-imagination of Disney via acquisition is about creating significant long-term earnings power.

I don't believe the earning potential of this company is anywhere near priced into the stock, even as it looks pricey at first pass. Shanghai Disney opens in 2015. How is Disney's magic, which now incorporates Marvel and Star Wars, being exported to the Chinese population priced into the stock? It's not.

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