Nothing's ever good enough. Not from these levels. No matter what companies say or do, their stocks can't make headway.
It's time to drill down to find out why that is, using six companies that have reported this week, all of which reported incredible numbers. Let me make this very clear, when I say incredible, I mean downright outstanding.
That's right, two food companies, General Mills (GIS) and ConAgra (CAG), one restaurant chain, Darden (DRI), the largest cruise ship company, Carnival Corp. (CCL), the biggest auto parts retailer, AutoZone (AZO) and the second-largest homebuilder, Lennar (LEN), all astounded when they reported.
And what happened when they reported? How about nothing at best? How about, in a couple of cases, some of the biggest declines of the day?
This is the kind of unfathomable bear market behavior that has plagued this tape ever since it peaked back in June in conjunction with heightened calls for a Fed tightening and the collapse in the stock market of the second-largest economy, China.
Let's consider each.
First, the food stocks. ConAgra beat the headline number by five cents, an outstanding $0.45 vs. $0.40. I would say it was a clean beat, but that wouldn't nearly capture how fabulous this number really was. This company, under the newly named CEO Sean Connolly, is re-energizing an old line food company, undoing years of indolence as well as some executive decisions, namely the ill-fated acquisition of Ralcorp's private label business.
The transition, pressured by activists, is astounding. Each individual product line is getting a boost and the re-making of some old brands on the fly is producing instant results. Meanwhile the charges have been taken for the private label sale and the auction is proceeding apace. Given the strong position the company has even though it hasn't panned out for ConAgra shareholders, I am confident that they will be winners on the go out, perhaps from a very big bid from Treehouse (THS), which can afford to do so given that, unlike ConAgra, that's its core competency.
What happens? The stock immediately drops two bucks and it is among the biggest losers of the day. What the heck did the market want? There wasn't anything better that could have been delivered. No one expected an announcement of sale of the private label business. They were hoping for a positive update, and they got it. I was just astounded at how this company's stock didn't rally, and rally hard, on this news.
General Mills put up a number that just enthralled me, $0.79 vs. the $0.69 I was looking for, and I am a huge Mills bull. I loved the fact that the Annie's acquisition is paying off greatly and that CEO Ken Powell is taking out a lot of the unnatural and inorganic from its once stodgy product line, while at the exact same time sacrificing some revenues and profits, with the sale of Green Giant and Le Sueur brands to B&G Foods (BGS) in order to make the portfolio even younger and fresher. This is tough short-term, but a fantastic long-term medicine to take, and you can't even really tell that Mill is going to take a hit, because the proceeds will be plowed right back to shareholders in terms of increased dividends -- which are already pretty big given the 3% yield -- and an even bigger buyback.
It was an outstanding quarter. What did the stock do? How about go up a few pennies and nothing more. It's up 7.5% for the year with seemingly no more room to run.
Darden simply clubbed the estimates: $0.68 vs. $0.58. But those earnings per share barely begin to scratch the surface of the transformation that CEO Gene Lee is bringing to this once very tired restaurant chain. This company, which had pathetic same-store sales numbers for ages, put up 3.4% vs. the 2.7% that people were looking for. I was blown away and not only was Olive Garden terrific, but you are at last seeing some incredible mid-single digit gains for the higher-end Capitol Grill, which had totally languished under the previous administration. Long Horn looked pretty darned good, too.
How did the stock do? After opening higher, it ended up being smashed, one of the biggest decliners of the day on what I regarded was a throwaway comment on the inability to keep taking margins higher in the second half. I say throwaway because this new management knows how to play the game and under-promise in order to over-deliver.
Carnival Cruise sailed right past the estimates on the top and bottom line and gave you a $0.17 increase in estimates. These new numbers reflect strong demand, tight supply of ships, and some excellent forecasts out of Europe and China. That's right, the two most challenged markets for many. What Arnold Donald has done here is nothing short of incredible, with a 35% earnings improvement over a 25% improvement the year before. Please remember, this is a company that many thought was a goner after a series of tragic accidents.
Goner? It has some of the best growth of any consumer company I follow, and the gains are just beginning, given all the price increases, revenue gains and fuel cost reductions ahead.
The stock? Like the others I have mentioned here, it was one of the biggest losers of the day.
I was very fearful that AutoZone might be seeing some slowing comparable store sales after that last quarter, which was good, not great. Well, guess what? This quarter was great, not good, with same- store sales up 4.5% when I was looking for about half that. The numbers got better through the quarter, which allowed you to raise forecasts nicely. Not only that, but here is a company that directly benefited from lower gasoline prices as car usage is up fairly noticeably year over year. Many thought the buyback, the most aggressive of any company on the New York Stock Exchange, one that has amounted to the crunching of one-third of all stock in five years, was accelerated. It was magnificent.
The stock? It opened up, rallied a bit and then finished down!
Finally, the second-largest homebuilder Lennar saw its earnings increase 26% on a 22% increase in sales. Virtually every line item I was looking for beat expectations. There is simply not enough supply and improving demand, and Lennar is in the best position of any homebuilder, because it has more demand and a steady supply of homes, given some incredibly brilliant acquisitions during the housing downturn. Not only that, but the company made it clear that there's not enough supply, labor or credit available to make it, so the industry goes crazy with overbuilding. It was music to my ears, and you know that slow and steady earnings gains always win the race.
But not the day that Lennar reported. Nope. It opened nicely higher but after the conference call, which I would describe as 98% positive with 2% just being about some weakness in Houston, the stock ended up getting clobbered, again one of the worst performers of the day.
What does all of this mean? What can we conclude when these companies report sharply better than expected numbers in every case and their stocks do nothing anyway?
It means that we are in the grips of a powerful bear market that's not letting anything go higher, even if the stocks have done little or nothing to date, which is the case for all but Darden. It means we have to lower our expectations for even the best and raise our expectations for pain from the worst.
It means we are not anywhere YET where we can mount an advance. Why even bother to mention the word "Yet?" Simple: because in the end, all of this good news will cause people to re-think their negative stance. You simply cannot have endlessly positive earnings reports and not get some increase in prices.
Maybe they will have to come from a different, lower level. Maybe people will realize that the Fed discussion has become an abstraction and these selloffs are just beautiful buying opportunities. Whatever; I can only counsel patience, not fright and depart, when the numbers are as good as these companies deliver and the reaction is as negative as can be.
It's wrong, maybe not short-term but long-term, and I urge that people recognize how hard it is right now, yet not toss out stocks just because the "action" is as negative as it has been. That's just not right, has never been right, and won't be right in the long run.
