So it begins -- another earnings season. Long ago I became convinced that these periods of information overload never truly end. Even when they are technically a wrap, investors always have an eye toward the next whirlwind of press releases. I suppose the key to a successful investing career these days is to survive an earnings season, build a watch list as it happens and then put money to work in between reporting periods. Out the window go buy-and-hold strategies or finding stocks trading at discounts to book value, as the now-buried writers of yesteryear said to do.
Naturally I am being very sarcastic -- because, for me, earnings season is life. There is no venturing out with friends, even on the weekends, and I completely avoid phone calls from friends and family (sorry Mom and Dad -- the kid is working). Experience has taught me this absurdly extreme approach is required in order to stay 27 steps ahead of the mere mortals. Though it has cost me a few relationships through the years, that's really too bad, because the market is addicting if you want to learn a whole bunch and make people money at the same time. Granted, I am not advocating you join me on the dark side, but look in the mirror today and ask this question: "Am I ready for second-quarter earnings season outside of the usual reading of the statistics offered in preview reports?"
If that question happens to be answered with a "yes," are you thinking in the following manner.
Alcoa as Predictor
Alcoa's (AA) first quarter fooled many in the market. On April 11, Alcoa closed higher for the session after the company issued the previous evening. However, the stock has lost 14.2% since then. The SPDR S&P 500 (SPY) rose on April 11, as well, but ended up topping out May 1. Note that Alcoa shares have badly lagged the SPY if you use the May 1 start of the pullback. This, of course, reflects the cooling in demand for industrial-related goods. Now let's take this a couple steps further.
My opinion is that proper analysis of management's language and hidden elements to the first quarter could have helped to predict current market circumstances. First, management oversold the story, lacing the 8-K SEC filing with silly sounding terms as: "strongly," "relentless focus" and "aggressive strategy." Second, Alcoa only raised its global growth forecast for the aerospace sector amongst its key end markets. That, by the way, looks poorly timed in light of the latest news from Boeing (BA). Finally, there was a reiteration of the global aluminum demand outlook, despite macro indicators beginning to show stress.
What I Am Seeking From Alcoa This Evening
● "Improved volume" language to be removed
● Strong emphasis on productivity initiatives in an attempt to overshadow volume weakness
● Lowered forecasts for end markets
● A reduction in the 2012 global aluminum demand outlook -- which may not be as bad as I think, given continued solid automobile sales
The "After" Thoughts
Should any of the items listed unfold, I will then be thinking:
● Many industrials with a heavy international weighting, defined as 40%-plus in annual revenues from overseas, could miss on second-quarter earnings -- and this would be against a lowered consensus. These firms could warn on the third quarter, as well, and guide the fiscal year below forecasts. Optimism on the second half would get zapped. Individual company earnings would supersede any positive-seeming actions by European officials -- and the vicious circle would be in full effect.
● If Alcoa drops the hammer, could industrials be bought on the "kitchen-sink guidance theory?" This refers to when guidance is perceived in as dreary a manner as possible, and the future is established as having the potential to surprise positively. Watch if an Alcoa-like name trades higher on bad news or modestly downward. It could be the market's way of telling us the "kitchen-sink guidance theory" is in play.
While I am at it, forget trying to analyze JPMorgan Chase's (JPM) balance sheet ahead of its Friday earnings in the hopes all the bad news is priced into the stock. (You won't be able to find the risks, anyway.) I would much rather the research be done on Fastenal (FAST), which has gained a cult following of sorts, given its "sharing is caring" mantra regarding monthly sales. Remember, Fastenal basically warned in June, and its sales growth rate has slowed in each month dating back to November 2011. The company's report, in tandem with Alcoa's, will set the tone for the first wave of sentiment on multinational earnings.