Forecasting the direction of individual stocks and the broader market are two things I have always taken extremely seriously. If you were to poll my old flames, they would collectively respond that I am too serious with this gig. (What, other straight males don't count clothes hanging on the racks at Lululemon (LULU)?) Nevertheless, earnings season is a breeding ground for developing new thoughts on strategy -- and, if you have been in the game for a while, there are undoubtedly insider-y items that others don't pick up on right away. On Twitter this creepy ability, or feel, would be represented by #VeteranAdvantage.
Now, I believe it's crucial to draw a line in the sand as to what's unfolding over this first wave of second-quarter earnings, and by way of this, we can establish a baseline to select stocks. It's just unacceptable for an investor to buy into the super-simple notion that, since earnings are surpassing consensus forecasts, the next step is to purchase borderline-garbage stocks.
But you can analyze balance sheet and cash few statements and spin all sorts of scenarios. Maybe a company with five quarters of decelerating profit margin expansion under its belt will have a higher share price on earnings day, as consensus wasn't expecting anything too grandiose. Maybe a company that's hawking commoditized products in Europe stands any chance at all to surprise on earnings, seeing as the message of the season so far is that outsized exposure to the land mass is not crushing corporate financials and outlooks.
Don't spin a clearly bad fundamental story to fit the musings of the consensus -- because, in this market, that is a recipe for portfolio calamity. Instead, dig deep in to why certain companies are sticking it to those predicting the end of profit-making opportunities in the stock market, and then widen your net to comparable companies. Here is how I am practicing what I am preaching, decoding key aspects as to why XYZ company is winning while a close peer is losing.
VF Corp. (VFC)
● The company told the market, once again, that it's gaining market share in Europe. This serves the purpose of balancing weakness in longstanding accounts.
● It delivered gross-profit margin expansion in spite of being a global business competing in competitive footwear and apparel sectors.
● It posted sales in Asia that are far removed from end-of-the-world scenarios, as they pertain to emerging markets.
● Structural areas of the business are such that guidance appears attainable.
● For buy-and-hold folks: Take a Zumiez (ZUMZ) long rather than Tilly's (TLYS). The action-sports category remains strong -- as demonstrated by the sales gain in the Van's brand of VF Corp. -- and Zumiez is trouncing the new-to-the-scene Tilly's on a comparable-store sales basis.
● For action seekers -- i.e., cowboys: Short Columbia Sportswear (COLM). The thesis is rooted in VF Corp.'s core brands, as well as in the Timberland brand, as it's gaining market share from Columbia in a challenging Europe. Moreover, Columbia has a historical propensity to issue guidance absurdly below consensus, and that will be met with a massive selloff this time around, in my opinion.
● For big picture thinkers: Wal-Mart (WMT) shares have cooled a touch. I'm not sure if this is the start of a sell-the-news into earnings in August, or if it's just a near-term rotation in faster-growing specialty-apparel names. But VF Corp. did point out challenges in its middle-income-focused jeans brands, and this is something I fancy the market has not factored into Wal-Mart. (The second quarter has to be strong from every which angle, given the run in the stock.)
● One for the road: One message that I have stitched together this week is that the market is willing to buy sector leaders valued as such, but at discounts to historical multiples and to the April market peak. VF Corp.'s comments on costs, specifically in cotton, as well as on Europe, Asia, and the U.S., may light a fire under Starbucks (SBUX) into its earnings report; hey, coffee costs are still depressed. If there is risk to this call, it's that Europe has logged another disappointing quarter that lengthens the turnaround of this business until mid-2013.
You should be keeping a list of companies announcing new restructuring plans that have the quickness to materially benefit second-half 2012 profits. These will be the buys, barring any significant downturn in the global economy that kills the perceived benefits of cost-cutting and productivity enhancements. One example here is PPG Industries (PPG).