Banks like JPMorgan Chase (JPM) kicked off what is likely to be a disappointing, if not outright dismal second-quarter earnings reporting season. JPM's results missed both top and bottom-line expectations and the company suspended its stock buyback program. The stock lost more than 3% in trading Thursday as a result.
My regular readers know that I have been banging the drum for months that the combination of surging prices and a fast-slowing economy was going to produce more negative impacts to profit margins that most analysts were factoring into their projections. Analyst firms are now acting fast to revise their too optimistic projections.
A Goldman Sachs (GS) analyst noted Thursday that 'Sell-side analysts are scrambling to get ahead of Q2 earnings; over the last 5 days they've downgraded more than 500 names (on a net basis). Since the Financial Crisis, there's only been 4 other weeks when that many names have been downgraded that quickly." Meanwhile the main strategist at Bank of America (BAC) slashed her S&P 500 estimate by 25% to 3600.
Things are hardly better in Europe where the euro has hit parity against the dollar for the first time in two decades. The prime minister in the U.K. just resigned and it appears the current government in Italy is also in danger of dissolving. Surging inflation is triggering large demonstrations in several regions of the continent.
For these reasons, I still believe equities have another leg down before we find a bottom.
I am sticking to deep value stocks for a good portion of the dry powder I am deploying on big down days in the markets. I'd rather have a high-quality homebuilder like Toll Brothers (TOL) selling for under five times earnings than a tech stock selling at 20-25 times profits based on 15% to 20% earnings growth that is more likely to be 5% to 10% as the country enters a recession. Even if earnings expectations for Toll Brothers take a significant hit, a lot of bad news is already priced into the shares.
I also like defensive sectors of the economy that won't see earnings projections take a big hit in a recessionary economy. Healthcare is one such area of the market where I have increased allocation to in recent months. Names like Merck (MRK) and Bristol-Myers Squibb (BMY) are two I have been accumulating. Neither is expensive and both pay around a 3% dividend yield to boot.
Almost all the new money I am putting into the market on dips is being done via covered call orders to provide an extra layer of downside protection. My cash allocation also remains just north of 20% in my portfolio. I believe this is a prudent stance given my view that the overall market hasn't hit bottom yet.
