You can always tell when you are in the heart of earnings season. It's when people shoot first and don't even bother to ask questions because they are already so wrong they can't. This market is littered with these mistakes.
When I first got in this business, there wasn't the rush of journalists to break stories that match headline numbers with consensus numbers. These days multiple wire services try to get a jump on their competitors by scanning the numbers in the release and then matching them against pre-determined cheat sheets to see if the sales and earnings are better or worse than expected. Once they've compared and contrasted, they pull some reason from the release about why something might be better or worse than expected and then it is on to the next. This kind of lunacy occurs all year, but this week, the biggest for earnings announcements, creates such a rush to judgment that fortunes get lost following and trading off these bullets.
Take today. Hasbro (HAS), the toy company, reported this morning and the vast majority of the services that sift through these press releases pronounced it a terrific quarter, both on sales and earnings. Makes sense; the stock's been up more than 30% because it keeps churning out hit after hit, and because it has such a close relationship with Disney (DIS), enabling it to capitalize on releases like the smash hit Frozen and the soon-to-be-boffo-box-office Star Wars sequel.
Despite those headlines, though, the stock opened up pretty much unchanged. Uh oh, if it trounced the numbers should it really have opened relatively flat? Shouldn't it have been up big?
No, it turns out, because when the company conducted its conference call we learned, deep into the narrative, that things are not all that well at Hasbro. As CFO Deb Thomas told you after lots of flowery discussion, "Growth in the boys' and preschool categories were more than offset by a decline in the game and girls' categories."
Whoa there, Nellie. What does that mean? You continue to listen and you hear that gains in a number of older franchises like Nerf, Playdoh, Monopoly and other time-honored hits were "more than offset by declines in a number of brands" including Transformers, Furby, My Little Pony and the Littlest Pet Shop.
Ouch, "a number of brands."
"More than offset." Some real suboptimal language.
How weak was the good that it was overwhelmed by the weak? And how horrendous was the bad? Lots of us bought this stock over the years because of strength, not weakness, in the Transformers and My Little Pony brands. Have they run out of power? Wow.
Suddenly the stock gets pummeled, falling more than 7%. The headlines, while not wrong, meant nothing. They were worthless.
We saw the same thing happen not long ago in Intel (INTC) when it reported. We almost instantly heard that the giant chipmaker was lowering its forecast for the fast-growing data-center business, so Intel must be slowing down. Lost in the headlines? The very subtle discussion by management about the possible bottom in the weakness in personal computers, perhaps because of the strength in Windows 10. Plus, the company was able to explain away what I had been concerned about, the weakness in the next big line of fast chips. It's a new facility, and lots of chips have to be thrown away -- the yield -- before things start humming smoothly.
Plus, the company couldn't even talk about its acquisition of Altera (ALTR), a very good telecommunications chip maker. That acquisition now looks a little more like a bargain considering all the fevered mergers and acquisitions in that category, including the bidding war that's broken out between MicroSemi (MSCC) and Skyworks Solutions (SWKS) for lowly PMC Sierra (PMCS). (Skyworks Solutions is part of TheStreet's Growth Seeker portfolio.)
JPMorgan's (JPM) not much different. Here the headline writers picked a negative piece of data about trading, a comment about that division's weakness that might continue into the next quarter, and manufactured that into a forecast cut. Again, the stock's up nicely from where it traded.
Despite a strong belief among skeptics that the best growth days are over for Netflix (NFLX), that stock's been clawing its way back up today. Some are finding the story of credit card expirations as a reason for the weakness in domestic sales as credible. Others are reminding themselves of all the countries that are being rolled out. It feels a little like Disney, which fell from $121 to $95 and has been working its way back up, aided by an aggressive buyback. You are up 13 points if you bought that panic low.
Then there's the curious case of Valeant (VRX), the pharmaceutical company that the quick-drawing headline writers immediately blessed both the top and bottom lines. Terrific, right? Valeant, by moving up prices and cutting research and development, continues to deliver.
Not so fast. It looks like Valeant's not tone-deaf. It's received a number of subpoenas lately about what politicians think are excessive price increases, and the company announced it would keep price increases to low single digits next year and would actually boost research and development.
As I said to David Faber today, that's exactly the opposite of why so many hedge funds loved Valeant. The positive headlines about sales and earnings were all meaningless. The substance of the call was terrible and the selling in this once-loved buy-to-grow roll-up just won't let up.
We saw the same thing happen on Friday when General Electric (GE) reported a terrific quarter and somehow the headline writers judged the revenues weak. The stock sold off about 40 cents before the market and fast-moving hedge funds tried to get out ahead of a wave of expected selling. But the headline writers weren't able to grasp that its top-line organic revenue growth -- the real metric -- was up 4%, which is huge vs. its competitors. Once people read through the full deck and listened to the company, they realized that not only were the revenues good, they were great! The stock continues to rally. (General Electric is part of TheStreet's Dividend Stock Advisor portfolio.)
Now it's difficult just to slam all of these articles because there are always the stories that are gotten right. My charitable trust owns Morgan Stanley (MS), and when the headlines came out, they were just abysmal, weakness all over the place. Unlike JPMorgan, it wasn't just one portion of the business that was weak. As CEO James P. Gorman said in the release, his company is going to "focus intensely in addressing areas of underperformance." Areas? The stock is screaming to investors: Sell me! I wish my trust could, but if I mention a stock on air I am frozen, so the trust is in the awkward position I tell you that you should never be in, a position of hope, hoping that the market goes up enough that I will have a chance to sell the stock. (Morgan Stanley is part of TheStreet's Action Alerts PLUS portfolio.)
But your main takeaway should be that you simply can't possibly make a judgment until you find out what the heck is really going on, not until you hear all the commentary about the current quarter and then the forecast for the future usually about one-third into the call right, before the Q&A.
Again, there are always outliers, but in every instance I just described for these massively capitalized stocks, the news flow was just plain wrong. In some cases, the headlines will be right. However, as these examples show, you're just rolling the dice paying attention and taking action on the headline race, where those who write them are never wrong and are never corrected.