Even with a weak start to the year for equity indices, the robust 2013 rally -- with exceptional strength in the last couple months -- lulled investors into complacency. Earnings results have actually not been so bad so far -- more data in a second -- but the reactions from some misses indicate that the buy side was secretly thinking that rising stock prices must be indicating that business conditions are better than we think. Au contraire, mon ami.
The pummeling suffered by Best Buy (BBY) is case study number one. The revenue results previewed Thursday were actually not all that bad. Comps were down around 1% instead of being up 1% as expected. This is by no means good news, and the pricing/margin outlook was discouraging. But does it justify an overnight 30% haircut that shaved nearly $5 billion off the market cap? Clearly, investor expectations were far more optimistic -- for the quarter and for the coming year -- than was reflected in printed expectations.
Intel's results were similarly uninspiring, although not creating the sort of disaster that Best Buy saw. Gross margin was a point better than expected, but revenue growth of 2.6% means Intel (INTC) can no longer be classified as a growth company -- especially since they guided to flat revenue for all of the year. Despite that headline, all is not bad in chip land: Micron (MU) blew out numbers last week with a 60% upside surprise.
Financials are coming under suspicion with the miss at Citi (C) as well as the less well-followed Home Banchares (HOMB). SLM Corp. (SLM), the stock formerly known as Sally Mae, also blew it, missing earnings per share by 14%.
These headline-grabbers are covering up the fact that more surprises have been to the upside than downside. The table below lists the major names reporting this month so far and how they have looked on earnings. As I scan the list, my feeling is that this earnings season is "mixed" so far. It is not as disastrous as some of the headliners would imply, but it certainly is not the upside blowout that market performance in December might have implied.
We need to wait and see how the next couple weeks come in before passing judgment.
I got caught flat-footed by Best Buy too. I have been in it for most of 2013, and did not see the miss coming -- or at least, the reaction to the miss. I blew it out Thursday, taking the loss. My experience has been that when the earnings momentum turns, it usually continues down for some time. As of Thursday, there are better ideas out there in which to deploy capital. I may be back in BBY someday -- in fact I probably will be -- but not now.