Hey, guess what? The second quarter is two-thirds done.
I know, I know who gives a rats tail on the conclusion of the second quarter as we still have to contend with four weeks of domestic data and, oh yeah, that Greek election thing. These are precisely the reasons why I would like for you to ponder the second-quarter earnings season today (not tomorrow, not next week). When nobody else is outwardly discussing the what-ifs that should be your signal to discuss them and act upon them.
There will have to be a couple decisions made as the second quarter gets put in the history books.
First, whether to buy stocks 5-10% lower than they are today (using the S&P 500 as a proxy) as U.S. data signals contagion in manufacturing, household consumption and employment from the EU's developments (including a Greek exit by year end/near-term) and the negative train that was in motion exiting the first quarter.
Second, whether to buy stocks at marked-up prices from today's levels as the EU forms a game plan that removes the failure risk from the project. Or, third, avoid the market altogether as we encounter at least two quarters of top- and bottom-line deterioration that is worse than implied in the first quarter financials/outlooks. There is likely to be new twists and turns on how to play the market as June progresses, but keep this basic template in mind.
I am in the camp that for the very near term (or until the next catalyst to get long presents itself), out-of-favor stocks stand to fall further out of favor. Below is a list that I have put together of unloved stocks that capture the essence of the current environment and could be used to retest your resolve with the holdings in your portfolio.
Abercrombie & Fitch (ANF)
- Decelerating same-store sales trend in Europe, a mish-mash of sluggish demand at flagship store destinations and Hollister mall-based stores.
- Lowered its same-store sales estimates for the fiscal year and tried to soothe the market by reiterating its earnings-per-share guidance, citing cotton cost benefits. But outlook is at risk in a decelerating European top-line backdrop.
Crocs (CROX)
- Warned on the second quarter as it went from 6% sales growth in the fourth quarter in Europe to a 2.9% decline in the first quarter. One warning leaves the door open for another one if Polo Ralph Lauren's (RL) comments on Europe were any guide (came late in the reporting season, good proxy).
Electronic Arts (EA)
- Over 40% of its sales run through Europe.
- I have been very bearish on this stock, but if forced to consider a contrarian long this is where I would start, given the vaporization of the relative valuation premium. Moreover, Electronic Arts has drastically reduced its expense base through deep restructuring and has strong sales and margin drivers in digital/mobile products.
Arrow Electronics (ARW)
- I would classify the company as an industrial. Arrow missed on first-quarter revenue and earnings and issued a warning.
- The global components segment sales fell 14% in the quarter due an Asia/Europe headwind combo. The segment represents about 69% of total annual sales.
Harley Davidson (HOG)
- Sort of resembles the story of Abercrombie & Fitch in that it did its best to temper market concerns. The company raised its shipment guidance, but the reiterated gross-margin guidance seems at risk given the softness in first-quarter European sales.
