When you try to game earnings do you want stocks of your companies to go down ahead of their earnings reports or do you want them to come in hot before what we call the print, or the numbers that will determine their direction for the foreseeable future?
Given that almost a third of the S&P 500 reports this week and, amazingly, we took out the old high for the index today, it's imperative that we analyze how the stock of a company behaves before the company reports because, far often than not, it often determines the direction of the beast, and not necessarily in an intuitive way.
After investing for forty years I have concluded that its almost always counterproductive to have your stock run into earnings.
More often than not it spells a reason to take profits even if it's a good quarter and it can be a disastrous if it is a weak one.
Let's take exhibit A, Apple (AAPL) , perhaps the most important and visible stock in the S&P 500 which reports Tuesday. This stock has run endlessly into earnings and there could not be a worse setup given that there are many Apple bulls among the Wall Street analyst community and therefore there's no one to convert.
Sure, it was an easier call to figure out what would happen to Apple 50, 40 or even 30 points ago where there were plenty of bears ripe for the turning. But now I just see a lot of camp followers itching to use this quarter as a reason to downgrade, flee, or do whatever they want based on the fact that there's plenty of time before there is a phone iteration that is worth getting in front of.
These are people who regard the service revenue stream as a nuisance to forecast at best, and a distraction at worst, because their earnings models, the matrix of what they predict Apple can earn NEXT quarter, dictate their thinking and these models are not going to be changed by service revenue or revenue from AirPods or Watches either.
So, if Apple had not run so much there would be plenty of room for some upgrades and price target bumps. Sure, it did trade to $233 but that was before the China disappointment and while we hear that China is better, it is a stock of fear for the moment. I think everyone's on board, so call me concerned even as I think the stock's cheap and should be owned not traded.
Consider it a little like the stock of Disney (DIS) . We all pretty much presumed that "Avengers: Endgame" would break records, so when it smashed the billion-dollar barrier, it was reasonable to presume it could go higher. But the setup was terrible, a monster run into the movie. That's why I wanted to scream at the buyers, please, please don't pay up, you are almost guaranteed to lose money if you do. And they did. Bunch of rookies.
I fear rookie-buying in Apple, too. I think if you haven't bought it yet, you might as well wait to see the quarter. Otherwise at this point, after a gigantic move like Apple's stock has had, you might as well write it off totally as one you missed.
Your best setup, the most bullish, is a dip ahead of the quarter. It doesn't have to be a big one, just enough to give a stock some breathing room, some space against analysts who think that it's a post-Avengers moment. That was the case with both Facebook (FB) and Amazon (AMZN) . The stocks of these two FANGers had been red-hot ahead of the quarter but took enough of a header right before their reports that there were few rookies and even fewer analysts looking to make names for themselves with a downgrade. Perfection.
You want the classic best of this ilk? Look no further that toy-maker Hasbro (HAS) . I don't know if I can recall a stock with lower expectations than this one given the multiple and severe disappointments totally not of its own making, as CEO Brian Goldner has patiently explained each time on Mad Money. The disappointments here were all about excess inventory in the channel, which the company couldn't control because the entity that unleashed the inventory, Toys R Us, ceased to exist pretty much in record time. That's the perfect setup for a flock of upgrades and now the analysts will serve as trampolines every time the stock goes down. It's a perfect situation.
The worst example. The stock of Monday's Mad Money guest, 3M (MMM) , which had rather gingerly been going higher on nothing -- meaning nothing new -- from the last quarterly report. The stock tacked on about 30 points after a so-so quarter, a truly puzzling event and the textbook example of be careful of what you wish for before an earnings report.
When the company's CEO, Mike Roman, had to deal with both a shortfall and a forecast cut, the twin enemies of capital appreciation, the stock plunged 30 points, a shocking development. The run accentuated the negative reaction and I don't think it's over given how hard it will be to turn around. But let's see what Mike says before we jump to a conclusion after this extraordinary give up for what may be the classic blue chip -- if we still have them -- of our generation.
Of course, there are lots of variants. Take Intel (INTC) . I found the results from the giant semiconductor company downright baffling given that the stock had run so hard into the quarter. I found myself thinking what do people know? All that happened to explain the late gain was Apple's decision to go with Qualcomm (QCOM) rather than Intel for its modem business. That's a negative, at least long-term, not a positive, for a company too linked with the data center and the personal computer, both of which, shockingly, were not so hot, to put a gentlemanly spin on things. It was a horrendous prelude and has left a real stink around the stock.
I don't see how the company can mount a comeback anytime soon especially if Advanced Micro Devices (AMD) tells a good story about both end markets and we realize the problems really are Intel's not that of the customers.
It's a rare bird that can buck these trends. The cloud kings, stocks of ServiceNow (NOW) and VMWare (VMW) , have been able to pull it off, but it's not universal as anyone who owns the stocks of Workday (WDAY) and Salesforce (CRM) knows. Far more likely is the accentuation of a current downturn. The almost rabid desire to get out of, say, the managed care stocks, can be an exacerbating pattern, a code red, signaling that it doesn't matter what the company says, the stock's going down. It's a most sickening pattern and it must be respected.
So, my take: Be careful what you wish for -- a gentle dip ahead of earnings can be the best immunization against a hammering while a stock that comes in too hot, like a jet landing on an aircraft carrier, misses the decks and faces certain obliteration.
(Apple, Disney, Facebook, Amazon and Salesforce are holdings in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells these stocks? Learn more now.)