Welcome to the Gauntlet, the 72-hour period when the majority of the important companies report -- and it's pure mayhem. Stocks are flying all over the place and plenty of people aren't investing, they aren't even trading, they are betting, often in a totally uninformed way.
So, let me give you my guide to the Gauntlet, which, by the way is also the name of one of Clint Eastwood's most underrated film.
The first thing you need to know is that this game is much harder than it looks. Companies are not horses, with the CEO as jockey and the horse as the enterprise. When you go to the track, you go to wager on winners. Unlike the ponies, there are lots of winners, in this earnings season, in fact, many more winners than losers, so you would think that you could be going to the window with winning tickets both in the morning and the evening. It's not the case, though, because the winners tend to surprise, while the losers just show up and no more.
What defines a winner in this earnings season? Let's take United Parcel (UPS) , with a stock that vaulted 19 points on the strength of what looked like an amazing quarter, but that's not what drove the stock higher at all. Yes, the gross margins were amazing and the pricing per package was unbelievably good, but what you needed to know about UPS is that the CEO, Carol Tome, has repeatedly been dismissed as someone who couldn't tame the beast, the unwieldy package delivery company. That's even despite that she had been on the board since 2003 and had seen what had gone wrong, even as she was the dominant CFO of her time, when she ran the finances of Home Depot (HD) .
Tome came on "Mad Money" after the last UPS report, which was widely panned, and said that was it, from now on she would beat all her targets. She did so. For many companies and their stocks, beating targets would mean little to nothing. Ask the shareholders of Procter & Gamble (PG) or Coca Cola (KO) , where the numbers were better and nothing happened.
The lesson here?
Go after stocks where you believe in the CEO, when you know others don't -- you need both pieces -- and then place your bets.
May I suggest that you may have that set up with Apple (AAPL) on Wednesday, a chronically underestimated CEO with a pastiche of business, cellphones, service revenue, wearables and fabulous machines, all under one roof appealing now to both the consumer and, because of work from home, the enterprise? Yes, the big change here is the Trojan horse, as most of the more senior execs use Apple at home, which is now Apple at the enterprise.
Oddly, I could add that I think that Facebook (FB) -- Apple's opponent when it comes to privacy -- may also be a candidate for a disrespect boost. I like Facebook, but I thought that when Apple decided to make tracking something we can opt out on, I thought it was disingenuous when Facebook said it would hurt small business. While I genuinely appreciate that Facebook has turned to focus on small business, small businesses don't track us. As a small business person, I cry foul on that one. The endless fouls called, though, create the opportunity to buy a good stock at a discount, provided that they don't cite Apple's policy a reason to bring their forecast down. I bet they don't, but then, again, with Facebook, we now regard anything as possible.
Next, you need a situation where a company's cheap vs. its cohort and can play catch-up. That's Wells Fargo (WFC) or Goldman Sachs (GS) , one underestimated because of past transgressions and the other, because its earnings were viewed as episodic. Both exploded on their earnings, because they shocked people vs. their peers by delivering earnings that were on a different plain from the past. I still like Wells Fargo here, because it is incredibly cheap per its book value, 1.1, the relevant method of valuation.
Here, I think the next one that could be seen as overvalued and deserving of a higher price would be Ford (F) , which reports after the close tomorrow. I know about the chip shortage, but I think that what matters is that the company has decided to stop selling cars in areas where it can't make money. That gives you a chance to simply stop bringing down the great American profits. It's a wholesale change in the way Ford does business. Yet the stock sells at 10-times earnings, oddly the same price to earnings, slightly more than the still undervalued Goldman Sachs but still reasonable in a new car- and truck-starved world.
Sometimes the best way to learn from the Gauntlet is to look at what failed to rally. Let's consider Tesla (TSLA) and Netflix (NFLX) . Tesla didn't come in with heightened expectations. In fact, it was the most subdued I can recall, especially with the stock almost $200 below its S&P-addition-inflated high. The sales were terrific, maybe a little bit constrained by the semiconductor shortage. But the bottom line seemed confused. When you subtract a brilliant sale of bitcoin, to wrack up $100 million and you adjust for credits and stock based compensation, you get close to nothing. That's not what people were looking for. We had come to expect the perfect top- and bottom-line quarter and we only got the former.
When you get people hooked on both sales and earnings surprises, you can't just give us one.
How about Netflix? Here's a company where the expectations had always been low. But this time, because of the pandemic the predictions were sky high. There was only one problem. The company delivered sky high but then used the dreaded pull through term, meaning that instead of winning over new samplers at a continual rate, this quarter will depress the next.
When dealing with a company that benefited from the pandemic, be sure that it is still benefiting, and not running out of gas. My charitable trust owns Amazon (AMZN) , but I can tell you that if it uses the term "pull through," then you have a a Katy-bar-the-door situation.
Now, perhaps you don't want to play this game. Perhaps you want to invest. You know what works the best then? Looking at companies the market decided performed badly or examining companies that should have gone up more when they reported. The former? That's Honeywell (HON) and Union Pacific (UNP) , the former still stalled, but the latter making its way back, because the prospects are so good. The latter? That's Raytheon (RTX) , with a defense business that turns out to be our best hope in countering the Chinese, especially if they try to take Taiwan -- don't rule it out -- and AT&T (T) , which took the risk off its dividend, which put the position in your portfolio if you want yield
Yes, if you are trying to rent stocks for the quarter, you now know what you are looking for. But a far easier game is to invest after the report, and I think those are safer and saner opportunities.