They were bad, they just weren't bad enough. They were disappointing but not so disappointing as to freak us out and inspire selling. That's been pretty much the entire theme of this earnings season and it is explaining a lot of the moves we are seeing every day.
Where is this pattern most evident? The industrials. Take Emerson Electric (EMR). This morning it reported what I would regard as one of the most disappointing numbers I can ever recall from this great American industrial: sales down 9%, earnings down, earnings per share off 15%.
If that wasn't enough, CEO David Farr took away any hope for the future saying, "we expect the difficult market conditions through at least the first half of fiscal 2016. " Man, that's just awful. But not so awful as to attract sellers.
So how is the stock of this 3.8% yielder doing? It's rallying. You might think that's insane. But you have to understand that this group, this industrial group, is simply under-owned. The big institutions were scared that the earnings would be bad. They are real bad. However, not only is that yield a good one but Emerson increased its dividend. Sure it was a meager half a cent. You have to think of it like this.
The stock is de-risked. You know everyone who owns this one doesn't expect much. So, what happens if something good has occurred? The bar has been lowered to the point that Emerson 's stock may go higher!
Emerson's not alone. I was bummed last week about the Emerson quarter. There were so many lines of disappointment in a whole host of industries. The only line item that didn't deflate me was aerospace. I had Eaton (ETN) CEO Sandy Cutler on and I knew it would have to be a tough interview.
At the same time, I saw that the stock was yielding four percent. That is where I first started recommending it as an accidental high yielder during the great recession. Unlike back then, I am not the least concerned that the company might report a loss or cut the dividend. In fact, the cash flow was bountiful, much better than expected. The result? The stock rallied, not sold off.
Take Caterpillar (CAT).The company had already pre-announced horrendous earnings going into the formal quarterly report. The number was worse. The guidance even more negative. But did the stock, at that point at $70, plummet back to $63 where it fell to after the original blast of negativity? Nope. In fact the stock rallied. It is now up five points from that hideous quarter. And, take it from me, that was a hideous quarter. There was admission that almost all end markets, particularly mining and oil and gas and the whole country of China, were terrible. This is an astounding move and a sense, again, that Caterpillar represented a bargain, especially with a yield that was greater than 4%.
Or how about DuPont (DD)? Here was a company that reported a number that was so bad I didn't even deem it worth talking about. The degradation here vs. what I was looking for just a year before was astounding. I had no idea that a company could go from zero to minus 60 in a couple of quarters. Yet the stock? It's gone from $57 to $64. Some of that is because as absolutely gruesome as that quarter was, it could have been even scarier. But also because the company recognized it as repugnant, too, and the new management said everything was on the table for change. Everything. That's a statement that says get long and that's what people did.
It's not just the industrials. Take a look at the banks. At the beginning of this reporting period two banks reported what at the time were lambasted as weak quarters: Goldman Sachs (GS) and JPMorgan Chase (JPM).
I was on the set during the Goldman Sachs big swing and a miss. There was nothing in the quarter that made you think the number was anything but indicative of the state of things at my alma mater. I pointed out on air that the stock, which was dropping to $175 in pre-market trading -- off about five -- was now trading at its book value, which was absurd because it meant that the darned bank could close the doors and be worth more than it was selling for.
Sure enough, the stock's up 16 straight points since the quarter. I remember going back and forth with JPMorgan about how its quarter was perceived as disappointing -- even as there was only one line, the trading line that could be considered worthy of the term disappointment. Didn't matter. The stock dropped a buck from $61 to $60, putting it on a collision course with the September low of $59 or more. Maybe much more.
Nope! It turned out to be a tremendous buying opportunity. The stock of The Bank, as they call in it the hallowed halls, then pirouetted and jumped 10 percent. It doesn't feel like it is done going higher.
Why? Again, I think this was the quarter where investors finally decided that even without the Fed raising rates, these banks are too cheap. And if the Fed ever gets around to doing so, well then these stocks will just go higher.
Perhaps the most amazing moves are saved for the oils. I think this group had not only been written off for dead and had been abandoned, it was heavily shorted. That is because the chatter going into the quarter was one of credit crunches and dividend reductions. While it is true that a handful of smaller companies are really struggling, the only real dividend cut came from Marathon Oil (MRO), which was sliced from 21 cents to five cents.
My charitable trust had owned the stock in the mid-teens but we booted it. Why? Because we were afraid of the dividend cut. But the stock has subsequently rallied a couple of bucks since the cut. When the worst happens and a stock goes higher you can only imagine how high the best ones are going to go. And that's precisely the case with Exxon Mobil (XOM) and Chevron (CVX) which have broken out to levels that were inconceivable two months ago.
Exxon was at $68 the last week of August. It's now at $87. Chevron just ran from $69 to $98. What did these two behemoths do to earn those bragging rights? They actually reported better- than-expected earnings, even as it's worth noting that the projections had been brought down mightily ahead of the reports. A week ago, we did an off the charts suggesting the unthinkable: with oil headed rapidly to the low $40s, that you should buy Schlumberger (SLB) at $76. It seemed preposterous. Oil's up a couple of bucks since then but the huge oil service company's stock has ignited for 6 points.
In the old days people used to get so excited about the gigantic fields that Pioneer Natural Resources (PXD) had stumbled upon using new fracking techniques in the Permian. That was long ago and far away. Today, it reported and it simply didn't lose as much as people thought it would. The stock rallies ten cents on it.
So how can this be? How can all of these rallies be occurring? Sure, some of it is the gigantic portfolio manager underweighting as I mentioned. But there's also a sense that the Chinese consumer's on the mend and that Europe's turning and that the U.S. has some very strong markets, notably housing and autos.
In other words, the big worries are dissipating and yet the Fed's not about to have an emergency meeting to raise rates one week after it chose not to. In that environment these down and outers are as attractive as the safety stocks are unattractive.
How long can this rally last? I think it can continue right into Friday's employment number, where some of these moves should pause.
A strong number and the Fed will most likely move in December, which will keep propelling the banks but should cause the other stocks to stall. A weak number? We're back to safety first and the profits will be taken in these newfound ugly ducklings turned swans.