Sozzi's Day Ahead: Any Clue What You're Doing?

 | Oct 09, 2012 | 8:00 AM EDT  | Comments
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Stock quotes in this article:

wfc

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jbht

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fast

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gnc

Oftentimes a person will have no idea they are doing something wrong until well after the fact. A so-called "significant other" cuts the chord and offers scant explanations as to why -- yet chances are that the decision was made long ago because of your daily actions or, usually, inactions. For another example, I admit that I just learned the ins and outs of improving a "Klout" score on Twitter -- and apparently one action that is frowned upon is loading up a tweet with abbreviations that confuse the majority of your follower base. If there are no retweets, there is no Klout score boost (a damn shame, I know).

As it pertains strictly to investing, it was only recently that I realized a nasty habit was forming -- an obsession with digesting every headline and trying to build stock ideas and opinions on the market based on those headlines. I am not lying. Literally, I plowed through every single headline, whether it surfaced first on Twitter or in rapid-fire style as I stood staring at the beautiful, orange glow of the Bloomberg terminal.

Why the seemingly unhealthy infatuation, you ask? Aside from my DNA, which is coded to go at 180 miles per hour (because 179 mph is too slow), I have been trapped into thinking that a failure to rationalize a headline potentially means missing an inflection point in the market. In turn, the reasoning has gone, I would miss sectors that are harboring ideas I'd want to recommend.

It's great to be on top of things, and flipping on that knowledge switch during a night out on the town is darn sexy. But if doing so is clouding your judgment around the basic principles of investing -- and I sense this is happening to many of you, too -- a step back is justified in order to de-clutter the old noggin.

I undertook the brain-cleaning exercise Monday. Locked in a cubby hole in the upstairs library of my alma mater, I proceeded to devote 100% of my attention to a couple of critical early-going earnings reports and a drill down into pre-earnings plays that have found their way onto my watch list in the past two weeks. The exercise was as rejuvenating as a facial mask on a Sunday evening would have been. It was as rewarding, too, in terms of gathering last-minute ideas before the start of earnings, when a premium is placed on being able to stick and move.

Old-School Thinking: Drawing Conclusions from Fundamentals

Wells Fargo (WFC): The sixth sense I have on this stock stuff has been telling me that the market wants to sell banks into earnings on fear "sell-the-news" events will occur. These tend arise when the market has run higher in advance of the fundamental stories. However, watch the major sector plays and see if they are losing ground into earnings, as the news may be bought when all is said and done. I came out positive on Wells Fargo last week, and would let it ride into earnings.

On this stock, I am looking for two overwhelmingly positive fundamental attributes to surprise the Street, and one reassuring aspect. First, I'm seeking an upgrade in CEO John Stumpf's comments on the housing market -- and keep in mind that this is usually a conservative bunch. Second, I'm looking for strength in the housing components of the business. Credit origination was a nice aspect of the September employment report, and homebuilder backlogs were robust. Third, I'm watching for strength in housing components to accentuate what the company has done to bring down -- rather than "contain" -- operating expenses. If compensation is tied to revenue, for example, that would garner a thumps-up from me.

JB Hunt (JBHT): For realsies, you are doing yourself an analytical disservice if you're avoiding this stock into earnings -- as I recommended -- based solely on earnings warnings from FedEx (FDX) and Norfolk Southern (NSC). That's the easy way out, and I hate that. Grasp why you should shun the stock, and the rest of earnings-season derivative ideas could fall into place with ease. There is a high probability that revenue worsened sequentially in the dedicated contract services and truck segments, which place too much of a burden on the capacity solutions and intermodal businesses. Those latter two divisions have been the standouts, but they can only do so much heavy lifting as their sales moderate alongside the slower growth businesses.

Assorted Odds and Ends

● Financial comparisons continue to be tough for companies, and Fastenal (FAST) is a prime example. The market is asking you to pay up -- using historical norms and the pre-summer rally -- for earnings of companies that are decelerating, even considering any cost cuts that are padding profit margins. I find it difficult to get excited on this proposition, especially given that there is risk to the decelerating growth projections.

GNC (GNC): Give it a go-long into earnings, which should come later this month. The story will not disappoint, and I expect a good revision to the full-year earnings outlook, again. The company's online marketing is the best in the nutritional space. Further, this is a U.S.-centric business. It also offers products that, in my opinion, will be the last to be traded off should the fiscal cliff derail consumer confidence. This thesis deserves to be priced in now.

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