Aren't I afraid of profits coming down and costs going up? Isn't earnings period going to be very tough for stocks?
I get asked that pretty much every day, including by my partner, Carl Quintanilla on our morning show, Squawk on the Street, especially on the eve of earnings period.
I always struggle with an answer that's not too glib, but it usually involves a belief that a lot of the negativity is being baked in.
But periodically a gem drops right into my hands that can explain exactly how I feel. Today's diamond: an afternoon story in the Wall Street Journal entitled : "Investors Prepare for Profits Hit as Costs Rise, Economy Slows." The article goes on to say: "investors are concerned that rising wages and energy costs will eat into corporate profits, threatening the decade long bull market in stocks."
All I can say is Eureka! The more stories we see like that the more likely we are going to have a decent earning season and power ever-higher as we do so. Lowered expectations are the best kind of expectations and they can make for great markets.
Case in point, Delta (DAL) . Yesterday the well-run airline reported preliminary earnings of 85 to 95 cents for the quarter when the Street was looking for 80 cents with revenues that were sharply better than expected.
The stock shot up from $52 to $57. That's because the public and the hedge funds for that matter were conditioned to believe precisely what the Wall Street Journal said. Delta was supposed to have weak traffic. It was supposed to have mighty higher fuel costs .
So it was the classic short bet. When that didn't happen the shorts were obliterated.
Now let's consider the case of the incredible semiconductor rally. Not that long ago Advanced Micro Devices (AMD) reported a subpar quarter in part because a slowdown in crypto-currency and a muddled personal computer and data center lines.
The stock fell from $29 to $16. It was a jarring moment, one that Lisa Su, the redoubtable CEO didn't flinch from even as she made it clear that there would be some new chip designs that could take the world by storm.
Today the stock soared because last night chip bellwether Taiwan Semi (TSM) announced it was going to ramp up 7 nanometer production rates thanks to renewed strength in orders for Android devices.
Taiwan Semi's span of product cuts a huge swath and the market was searching for analogue and came up with AMD. If you were thinking of economic weakness and thinking of strapped consumers from gasoline, could you have caught this almost 10% move? Would you be able to jump on to Micron (MU) here after it bottomed so many points ago? Could you jump on Lam Research (LRCX) 60 points from when everyone was so worried that the second half of this year could be troubling. Now it looks like it could be bountiful.
How about the stock of Home Depot (HD) . Shouldn't that be directly related to the issues that the Journal says are plaguing the economy? Won't costs be rising here? Isn't housing already terrible? Will contractors even have the money to go from job to job now that gasoline costs so much?
When Home Depot reported recently they told a story of a quarter spoiled by a February with some of the worst weather imaginable. And the bad weather was all over the place.
Because of stories like that of the Wall Street Journal, people didn't believe Craig Menear, the CEO when he told a story that said he never blames the weather for the weakness but this time was different. They didn't believe the incredibly good CFO, Carol Tome, when she said it was business as usual. They chose not to believe the company that stepped up to buy stock for good reasons, because the stock had fallen too much. That's why the stock fell from $189 to $179. The negatives were coming into play. People had been too bullish about the stock and now they learned a hard lesson, that they can get hammered owning even the best of retailers when costs rise and gasoline goes higher and there's weaker demand.
Oops, wait a second, maybe that wasn't the right lesson. The stock's now at $198.36. You have to be buying it when everyone was running from it.
And then there's the most obvious of objects since Edgar Allan Poe penned the Purloined Letter: the stock of Apple (AAPL) .
Talk about a stock that had to be given up on. Not only was the American consumer supposed to be totally blown out by the coming slowdown. Not only was Apple in the crosshairs of the government of the Peoples Republic of China. Not only was its India strategy perceived to be a loser. Not only were the analysts almost uniformly giving up on the stock. But, once again we heard the catcalls, the best days were behind them because, when the company preannounced a bad quarter as the year began it wasn't shy about talking about a China slowdown.
We didn't believe it. Not one bit. So we flew out to see Tim Cook to find out whether the gloom and the negativity were justified, the same gloom and negativity that the Journal has isolated. The stock was at $149, down about 90 bucks from its high. It seemed as dismal as it can get.
I asked Tim whether the market had it right. He said "I'm never surprised by the market to be honest with you. Because I think the market is quite emotional in the short term. And we sorta look through all of that. We think about the long term . And so when I look at the long term health of the company it has never been better."
Now it is true that we have a lot of talk in the air about the nearness of a trade treaty with China which presumably would be good news for Apple. But the fact is if you bought into the gloom of the articles that were being written about Apple, the kind that are being written about now, you would have sold Apple at $149 after our interview and not bought it.
You would have missed out on 45 points.
Now, the purists would say just you wait Jim Cramer. We haven't even seen the earnings yet. But the more stories we read that are like this Journal missive the more likely we are to be able to handle the earnings in stride. It's only when expectations are high that you get in trouble not when they are low.
Now there are only going to be quarters like the grim reaper that visited Walgreen's (WBA) yesterday. However, that's a combination of managerial weakness as well as brutal competition. That's not what I am talking about. I am talking about the stocks of companies that are supposed to be turning down because aren't things slowing? Aren't things terrible? Aren't the comparisons going to be miserable?
Some will be. But when everyone thinks things are going to go bad because of gasoline, higher labor costs, lackluster sales? That's the best time of all to invest.
(Lam Research, Home Depot and Apple are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells LRCX, HD or AAPL? Learn more now.)
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