Wouldn't you know it? NABAF is back and it's driving tons of stocks higher that you might have thought from the headlines have no business going anywhere but down. Why? Because they reported quarters that were NABAF, my acronym for Not as Bad as Feared and that thesis controlled today's session. On another day that looks quiet but was anything but, we saw some astounding moves and bewildering moves that remind us that this market doesn't always react the way it is supposed to. If you are befuddled - like so many simpleton traders who don't get what's really happening - you have come to the right place. I have the answer behind the conundrum that forces stocks up that should be going lower.
Let's start with the railroads. This morning Union Pacific (UNP) reported and, even by its own admission, it was a disappointing third quarter. Its sales were weaker in pretty much every single cargo line. Listen to this recap: Energy down 15%, Premium goods, which includes the fabulous intermodal business, off 11%, agriculture off 2%. Only industrial was up, and that was a meager 2%.
The causes of the declines? Some are just ineluctable, like the endless declines in coal use.
But some are just plain old weak economy outcomes - slower autos, weaker lumber. And, perhaps most importantly, the absence of agricultural products going to China.
The instant reaction? Horror. I saw the stock down four points in the pre-market and I said, okay, we have a rough one ahead of us. Union Pacific is one of my absolute favorite companies. But I understand that when you get a release as you saw it, there's going to be some fallout.
But then the quarterly conference call begins and as it goes on you see the stock rally and then go positive. Why? Because the fact that the company could make so much money when so many volumes are weak is a sign of a changed enterprise. Tremendous expense control, maximized use of locomotives, workforce reductions, all contributed to a monster amount of profit on what would have been a sharp downdraft or even a loss in the old days. The company is just so much better run that the decline om the size of the cargos didn't matter. Plus pricing held up well, a function of how competitive railroads have become to trucks and long-term contracts let during better times. Or as Lance Fritz, one of the great CEOs out there, said on the call: "We have been a little disappointed in the top line versus what we were hoping to see when we came into the year. As a result we have adjusted head count more aggressively to match that drop in volume. You see that happening in the third quarter as we had head count lower than volume. And I expect we'll continue that way."
That's how you get operating revenue down $5.5 million or 7%, but operating income at $2.2 billion, only a 2% decrease. That's how you get a not as bad as feared quarter. That's how a stock can rally on a downside revenue surprise.
CSX (CSX) , which reported last night, didn't have as weak a set of numbers as Union Pacific, but it, too controlled costs as part of its precision railroading which drove, again, a quarter that was not as bad as feared.
Last night as I was leaving the office we saw a report from United Rentals (URI) , the largest equipment rental company in the country and it caused the stock to collapse in after hours trading. Down one, down two, down three, down four the stock seemed to not be able to find a bottom. But then on the call we heard how the company was able to rationalize costs to handle the downturn it expected. Again, here's a business that had been sink or swim, and it looked like it was sinking after it cut its earnings outlook.
The stock finally stopped sliding down 5%.
But then on the quarter you heard about outstanding expense control and a prescience of mind to cut spending and avoid being hit by a slowing in oil and gas, once a key market. The sellers must have felt like bumpkins because the stock ended up climbing six dollars. That's right from down 5% to up 5% because the quarter was not as bad as feared.
Few companies are as consistent as Cramer-fave Honeywell (HON) . That's why I was momentarily concerned when I saw that its revenues came in at $9.09 billion when the street was looking for $9.11 billion. In another time that would produce a shortfall and an estimate cut. Nope, the company earned $2.08 when analysts were looking for $2.01. Plus it boosted earnings while taking down the high end of predicted revenues.
Plenty of investors were worried about some sort of Boeing (BA) fallout for a company heavily involved in aerospace. No. Instead a 10% organic increase in sales. Do you know how hard it is to get double digit sales growth? It's no wonder that the stock opened up two and then cruised to plus 5%.
These stocks continue a pattern of what we have been seeing since this quarter began. So many traders were scared of UnitedHealth's (UNH) earnings that it had fallen to $215 not that long ago. After rallying 18 points on the day it reported, the stock jumped another six dollars. It was damn Elizabeth Warren and Bernie Sanders, full speed ahead.
Johnson & Johnson (JNJ) was supposed to be hurt by litigation risk. Instead the company proclaimed it was ready for any and all verdicts, which, by the way, have recently been going in their direction. Hints of an opioid settlement further propelled the stock which has finally broken out after languishing ever since a Reuters report about how the company allegedly knew that its Baby Powder contained asbestos which caused cancer. You have seen some outsized awards of late but there is very little follow-up on how they have been reduced or eliminated by appellate courts. That's how JNJ could have a better than feared quarter.
All of the bank earnings have come in similarly. How many times did we have to hear about how an inverted yield curve meant death to their earnings. How many times did we listen to Cassandras who told us to avoid even JP Morgan (JPM) because the Federal Reserve was cutting rates? But a robust consumer and fabulous expense control, much of it because of technology, allowed for NABAF in literally every single case, including Goldman Sachs (GS) which has been so disappointing an equity.
How about the ugly duckling numbers from Netflix (NFLX) that turned out to be swans: after a price increase the company suffered from churn and from a lower uptake in the United States and a huge increase in spend for original content. The stock couldn't have been crushed. But even Netflix, long a revenue/sign-up based story, produced solid earnings, $1.47 versus $1.04. Now initially the stock rallied up 25%. The stock couldn't sustain that increase but the better than feared theorem played out nicely.
Just in case, though, if you think that there's nothing worth fearing, remember the case of IBM (IBM) which did an in-line quarter but disappointed on revenues. The company recently bought Red Hat, a terrific addition to the flock. However it isn't big enough and, despite a huge increase in growth rate, can't offset the decline in sales of a very large legacy business.
Look, I think it's pretty obvious about what's happening here. The doom and gloomsters have controlled the narrative but the CEOs of most of the companies that have reported so far this quarter saw the pain coming and took decisive action. They combined deft technology with tough decisions to yield lemonade from lemons in almost every case except IBM. It's good news for shareholders who haven't been shaken out by the naysayers and it is a reminder that executives saw the weakness coming and adjusted for it before the slowdown occurred.
(Honeywell, UnitedHealth, Johnson & Johnson, JP Morgan, and Goldman Sachs are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells these stocks? Learn more now.)
