Why do stocks that should go down go up? And why do stocks that should go up go down? I know these seem like simplistic questions to ask but investing can be befuddling and I am here to pull away the curtain, to show you what's really going on and how there's more method than madness to the process. Why is this kimono opening so vital? Because few things can cause people to pull money out of the stock market than what seems like irrational actions that actually make sense.
So consider today's investment class in session and lets' go over the craziness and explain why it's sane.
Let's start with Caterpillar (CAT) which reported a huge shortfall and investors stood by helplessly as the stock fell 6% in early morning trading. While I thought that was an overreaction, we are all conditioned that a stock should be pulverized when it disappoints. And make no mistake about it, this one was not a NABAF, this one was not Not as Bad As Feared, it was worse than feared.
But a funny thing happened on the way to the cataclysm. Cat's 6% drop was the low. Those who sold the stock soon watched it rally getting back to even and then ending up having a good day. How is that possible?
Because this is no longer the old CAT we've come to expect, the one where we immediately expect giant layoffs, a suspension of the buyback and even perhaps a slash in the dividend.
But that's before this new CAT, the CAT run by Jim Umpleby company came on the scene in January of 2017.
Umpleby made it very clear from day one that he has had it with the episodic CAT, that he was done with the miserable boom bust cycle that made CAT the toughest of big industrials to own. Most didn't believe him. They figured that when things slowed down this man who is committed to growing the dividend and keeping a significant buyback would just turn tail like the rest of them.
But that's' not Umpleby's way. He wanted a clean break with the past symbolized by the decision to move the headquarters of the company from the stocks of Peoria, Illinois to Chicago.
So what did analysts hear today while Umpleby slashed his forecast? How about how the buyback continues unabated. How about the dividend's not in jeopardy as the cost take outs are relentless and CAT can make a lot more with less. You can often tell when a bad story turns good when the questions by the analysts are expressing befuddlement themselves. It's almost as if their questions created one overall impression: Wow this really is a new CAT. It really is more consistent. It really can deliver good numbers during a worldwide slowdown. I know I was spooked. I figured it was same old same old, and I was wrong. Then even better, we got some monthly machinery numbers from Caterpillar which showed month to month improvement when you would least expect it. This CAT is one you don't want to run from on a downturn, you want to run toward it. It's great to find a stand-up CEO like Umpleby, and while President Trump could rekindle the trade war if we don't see some sort of soybean buy from the Chinese, you know CAT's going from one of those cyclical stocks you had to fret about to one that's worth buying on any weakness knowing you can still get a large return back and even a dividend boost when you used to get the opposite.
Then there's Boeing (BA) . Now the news at Boeing is about as bad as it gets with almost daily revelations that make you feel owning this one is sheer tomfoolery.
But this morning the company reported a pretty nasty number and the stock went higher. Odd? Crazy? Chimerical?
No, the company simply crafted a scenario that said, safety willing, you are going to see the 737 Max in the air sooner rather than later. Now it's hard to predict when and I thought the headline writers didn't read the call when they said Boeing says it sees the plane flying in the fourth quarter. What the company really said is that the plane will be ready if the regulators say it is safe, a much different, less braggadocious scenario.
What I thought heartening and what the market reacted to? The call reminded you how the secular trend toward more airline travel will not be stopped by what occurred with those two crashes. The airlines need these planes and the company has given you hope that the company will be fine even if it takes longer than expected if the plane doesn't start up in the fourth quarter. That might be too optimistic but it seemed well vetted. Also, you recognized that Boeing is not a one-trick pony. There are service streams and defense streams and, perhaps most important, other planes, like the Dreamliner which has been cut back in production but that could be solved if the Chinese put in some orders. It made me think that if the Chinese want to offer a gesture of good faith, it just needs to pick up the phone and tell CEO Dennis Muilenburg that it needs some big planes to meet the endless demand. No it is not a perfecto story. And it doesn't have an ending just yet. The company has yet to get ahead of the endless drumbeat of negative news stories. But for the first time I felt that perhaps the press, including me, had gone too far in saying that Boeing's woes are overwhelming.There will be more revelations, more bad stories. That said, it does feel like we are through the worst of it and that means the old demand story is back in play.
Not that long ago, analysts had once again turned on the stock of Apple (AAPL) saying that the new 11 iPhone was a bust, that the Chinese were going to boycott the thing and that the President wasn't too happy with them either. It became a stock that, once again, couldn't be owned.
Last night Katy Huberty, the so-called ax, the analyst who matters the most shocked Wall Street with a gigantic price target boost saying that we should stop worrying about the possible shortfalls and instead be concerned with how big Apple's TV offerings are going to be. There has been plenty of snickering that Apple's offerings are meager. Nope, said the analyst the most plugged into Apple. The opposite. Apple's programming, in fact, might tip the revenue system over the edge as the dominant source of income for the company. Now, when Apple reports next week it's possible that it could sell off. Why not, it's been up so much. But Huberty makes a compelling case of my mantra, own it don't trade it, especially as the next big thing will be 5G and the biggest refresh cycle of all time.
Now there are instances where the market sells off a stock that perhaps shouldn't be sold off. The stock of Chipotle (CMG) got hammered today after reporting an amazing quarter. However, can we stipulate that a stock that's up 100%, a stock that's the strongest in the entire S&P 500, drops 40 points when it reports, especially when there are tough compares ahead?
My conclusion? With a loyalty plan ramping up, with some food costs going down, with digitization taking hold, you are getting a rare gift to buy a company that had a remarkable 11% comparable sales gain, with 7% of it being more traffic into stores.
Those are incredible numbers, worthy of a 100% move. Yep, this one's no irrational. Profit-taking does occur. What you want to do when you see it though,. One word, Buy.
You have every right to be confused by what happens to stocks on a day to day basis. I hope I just peeled back some of the confusion allowing you to believe in stocks and buy them and not be repelled by them. It's earnings season. It's one of four times a year when a company's stock trades with what's occurring. You just need to know how to fathom those occurrences play out versus expectations. That's the key to explaining the so-called inexplicable. It's why the bad might be good, and the good not be good enough, at least until further reflection when it's a buy.