The Day Ahead: Earnings-Season Rage-Out

 | Oct 17, 2012 | 8:20 AM EDT  | Comments
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It's strange how humans evolve, especially those special folk we call "stock handicappers." At the age of 21, I didn't know what an earnings season was in theory or in practice. At 23, I was eagerly learning the ins and outs to identifying corporate bull on earnings calls and post-call follow-up chats -- and sleeping on top of a conference room table, unbeknownst to anyone else. Four years later, I didn't begin the process of shutting out all of humanity -- for their own safety -- until two weeks into earnings season.

Now, at 30 -- which is really more like 60, as anyone close to me would know -- I am finding myself highly sensitive at the very start of earnings season. For me, it's "game on or die." Invest the time to amass information, or risk being that slacker who's repeating their three taking points on UPS (UPS) because they chose a night on the town instead of an evening with an earnings-call transcript. Hey, play on, playa.

With regard to this particular earnings season (which apparently is irrelevant), my more rugged, hardened self is testing old rules of thumb, in addition to monitoring trends, to be sure the market is not beginning a fresh rally based right under my nose.

Honest Abe's Rules of Thumb: Cliffs Notes Edition

"Relative outperformance of higher growth sectors, supported by indications of accelerating macroeconomic trends, is a sign of changing future fundamentals."

Many eyes have turned to data improvement in September vs. August as packing the punch to reactivate the rally. On Tuesday, the new dot-connecting exercise was that upside in industrial production meant a manufacturing employment revival -- which had lagged -- and, along with it, longer workweeks and checks to offset gas inflation. All in, this was to drive a very merry holiday season.

The industrial and retail complexes percolated in the face of subpar earnings from W.W. Grainger (GWW), WD-40 (WDFC) and Wolverine Worldwide (WWW). There are some mighty rosy assessments here, but it still doesn't sit well with me, seeing as TJX Cos. (TJX) has plunged, and it's absurdly clear that Europe's industrial performance was horrendous, causing a double-whammy of missed third-quarter earnings and lowered expectations for the balance of the year that exceeds the third quarter shortfall. So I render this rule of thumb as not being truthfully satisfied.

"Become one with the market, and decode if stocks are reacting to the past as opposed to the future."

Chew on this for a little while: What has sent stocks higher in the front portion of the week? It's the September data, which arguably reflect the market's rally right into the Federal Reserve announcement. Let that sink in for a second. I am concerned that the fear that crept back into markets post-Fed, plus a greater understanding of the issues at hand following the election, will not allow October to be a giant stock fest, as is being pumped into the heads of investors today. I have one word for this rule of thumb: #fail

"Is a pullback in the stock of a best-in-show company really a buying opportunity?"

Umm, an opportunity for what? Is it to lose on both sides of the coin -- on fees and stock-price direction? Honestly, though -- against this backdrop, if a stock that you happen to own cedes ground due to something in the earnings release, it's probably not a near-term buying opportunity. After all, this means there is a lack of data to reason the fundamentals will strengthen by the next earnings report.

Oh, yes, I think companies are being analyzed these days more with a top-down focus. If a company is operating well, a rebound in the global macro picture will benefit it disproportionately. But when we are swimming in a sea of choppiness, the stock will go down or notch meager rises that prevent a comfortable night's sleep.

At this point, I will continue along with a generally bearish opinion on the external environment as a baseline for selecting stocks. Disaster stories are favored shorts and get me excited, and longs have to have an "it factor" in order to make the risk worthwhile. Rifling off 60 stock ideas a month into a vortex ain't my thang, and to that I offer no apologies.

Earnings-Season Rage Out Session

ā— I have been on VF Corp (VFC) since the middle of the year, and the silly weak quarter from Wolverine Worldwide emboldens that call. On the watch list: Jones Apparel (JNY)

ā— Tiffany's (TIF) current price levels worry me. This leaves the stock susceptible to downside into a third-quarter earnings announcement -- and guidance for the holiday season -- that should be less than stellar.

ā— On July 30, I stood outside in some light rain with my pal Debra Borchardt and trumpeted the virtues of owning Swift Transportation (SWFT) for the long term. If you bought, sell into strength, because I'm not feeling transport comments -- such as those from CSX (CSX) -- pertaining to operating ratios, sales mix and fuel inflation recovery.

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