Keep an Eye on the Top Line

 | Aug 08, 2013 | 4:00 PM EDT
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As earnings season continues to work its way through the markets, I've noticed some similarities across a diverse group of businesses. Consider the following sample set:

  • Advance Auto Parts (AAP) reported results and beat analysts' estimates by $0.10 but missed revenue estimates
  • Costco (COST) reported July same-sales stores that missed estimates
  • McDonald's (MCD) reported very modest global sales growth in July, up 0.7%.
  • Standard Motor Products (SMP) reported an 18.6% increase in EPS, but revenue missed analysts' estimates

It's not hard to see the trend: Profits are growing, but sales are struggling. To be sure, the current yardsticks are based on analyst estimates, which may not necessarily be realistic. Also, some companies seem to been bucking the trend. Stein Mart (SMRT) continues to report very strong same-store sales growth, and Tyson Foods (TSN) reported strong numbers. But ever since the U.S. started climbing its way out of the recession, one of the first things many companies did was cut costs. So it became easier to report profitability growth, even if sales weren't keeping up.

But cost cuts will take you only so far. At some point you have to stop cutting costs and rely on the old-fashioned way of increasing profits: selling more goods.

As this earnings season comes to an end and we get ready for another, the top-line number is going to be one to watch. Beating earnings but coming short on sales gives analysts reasons for pause, and at least in the short run, analysts' opinions matter to stock prices. The market is also facing the first real probability that the Federal Reserve will take some action and slow down its pace of bond purchases. The stock market could be in for a real cleanse.

I would avoid any temptation to buy just for the sake of buying so as to not miss the party. The opportunities will come as they always to do. There are seams of fertile ideas today, names I've discussed before, such as Chesapeake Energy (CHK), Gentex (GNTX) and, more recently, fertilizer stocks, which fell hard earlier in the week.

Next week, we will begin to see the newest batch of fund 13Fs, which will give us insights into what fund managers did in the second quarter with respect to their portfolios. Until then, I'd focus less on the value of the Dow Jones Industrial Average or S&P 500 and focus instead on conference calls, management commentary and stock prices.

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