For all intents and purposes, second-quarter earnings season is done. Congratulations, sport -- you survived.
For myself, second-quarter 2013 earnings season was one of the more mentally stimulating in recent memory. Earnings calls contained an abundance of intriguing nuggets that helped us begin adjusting a winning portfolio as the year draws to a conclusion. My firm is currently focused on three baseline things in terms of its recommendations.
1. Stock action has been positive relative to the pressured benchmark indices in the past month or so.
2. We're overweight industrials and tech. The latter showed a strong earnings surprise in the second quarter, and that should persist, given an array of new products arriving later this year. Industrials with assets in Europe and China, meanwhile, stand to benefit from modest recoveries there.
3. Our forward price-to-earnings multiple is below that of the S&P 500 -- and assumes at least 10% earnings-per-share growth in 2014 -- so as to offer cushion if the market frets on future Federal Reserve communications. Note that I'm not talking about actual action. I continue to believe that the December meeting is what will bring the initial announcement of stimulus tapering, and that this will lead to implementation in January.
For the time being, there'll be no hero stuff in trying to pick the bottoms in interest-rate-sensitive sectors such as consumer discretionary and housing.
Beyond that, following are the best big-picture, thought-provoking things I learned from various August earnings calls.
Downshift to Dollar Stores?
A Sam's Club executive noted that members are trading down from steak to chicken and pork. That's disturbing to me: Despite the arrival of deflation to the aisles and freezers, this higher-income member is seeking to trim monthly expenditures for undefined economic or personal reasons.
As a result, I think these folks may be visiting dollar stores, perhaps for the first time. We recently recommended Dollar Tree (DLTR) due to its higher-income customer base -- shoppers there earn $40,000 and above in annual income, contrary to its peers. The company is realizing strong sales momentum in higher-margin discretionary merchandise, while competitors acknowledge the complete opposite.
An Unpredictable Consumer
When it comes to the consumer, don't let the employment numbers fool you. We're witnessing a lack of overtime, and real income is down 5% from June 2009, when the recession technically ended. So the consumer remains very unpredictable -- so much so that companies are now making adjustments on the fly regarding how to run their businesses in relation to the plans articulated to investors at the beginning of 2013.
Ripple Effects From Store Closures
This has negative implications for all sorts of industries, from truckers to railroads to mall owners. It's hard to tap into free Fed money for capital investment if your key national accounts are continuing to shrink and extend payment terms to preserve their own capital base.
Housing Grows Expensive
Housing affordability has taken a hit. Don't buy the stuff spewed by the National Association of Realtors.
I caught two signs, in particular, that the rising cost of credit has stunted the housing recovery's momentum. One, Home Depot's (HD) seasonal sales performed better than the core of the store. Two, Toll Brothers' (TOL) second-quarter deliveries increased 10% on a unit basis -- slower than the 33% rise in the first quarter. Second-quarter contracts gained 26% vs. a 35% advance in the prior period.
Good Vibes in Video Games
I was surprised by GameStop's (GSE) bullish comments on launch quantity regarding the PlayStation 4 and Xbox One for the approaching holiday season. Quantity appears to be strong -- the opposite of what happened at the beginning of the current console cycle. A strong case could be made, therefore, to own the primary games publishers Activision Blizzard (ATVI), Electronic Arts (EA) and Take-Two (TTWO).
Note: one of my top picks for 2013 was Take-Two, which has risen 64% year to date. I'll be riding that right into the upcoming release of Grand Theft Auto 5, due Sept. 17.
What to Stalk This Week
The market perked up following a Fed minutes release. As I've already noted, if you actually read that release line by line, it probably left you confused regarding the unleashing of the #Tapernado.
This recent market action may constitute the first part of a stabilization that I expect ahead of the September Fed meeting. I imagine it will be difficult, in that meeting, for members to square that stock action with the dreadfully low inflation and the marked-down gross domestic product growth. As the Fed considers whether to commence with an indirect tightening process, be on the lookout for bad news being spun as good news.
Note: I am scheduled to appear on CNBC as part of the "Fast Money" team today at 5 p.m. EDT. After my appearance on "Fast Money Halftime" last week, I was pretty touched by all of the support via email and social media. Feel free to continue firing questions at me on Twitter @BrianSozzi, and include @CNBCFastMoney. It would be my pleasure to answer any queries you may have about the markets or individual stocks.