OptionsHouse Week in Review for the Financial Markets
The S&P 500 started trading last Friday at the same level at which it closed on Monday of the same week. The Dow and NASDAQ were also flat on the week.
Even though Alcoa (AA) officially kicks off earnings season today, there were some earnings reports last week that began to pepper in a little excitement for some investors. For instance, Monsanto (MON) disappointed many investors with reports of lackluster earnings of only $1.70 per share. Reports indicated the agriculture giant missed sales and revenue forecasts and experienced marked weakness in their Roundup brand and other glyphosate herbicide products.
They did perform well in their seed division, but missed on overall revenue expectations and confirmed EPS guidance at the low end of its previously guided range of $3.10 to $3.30. MON also retracted its long-standing goal of doubling 2007 gross profit by 2012.
Surprisingly, with all this negativity, the stock actually moved higher after the report.
How and why does this happen?
One would think if the company is not making as much as analysts expected, the stock should be selling off, right? Not always. Remember, everyone has unique expectations of a stock’s earnings performance.
More Than Just the Numbers
Sometimes investors and analysts want to hear specific commentary about a certain part of a company’s business and insight on expected sales or growth of the overall company or even just certain divisions.
While it is extremely difficult to determine everyone else’s opinion, sometimes it helps to look to the past and note when it missed, met or beat expectations and the stock’s subsequent performance. If you have an OptionsHouse account, you can look back at this data by clicking on the ‘research tab’, under ‘financials’ inside your account.
In Monsanto’s case, the stock has moved to a relatively inexpensive p/e multiple (compared to past p/e’s and their peers). MON is down over 20% from its highs in January. I think that this time, the market may have expected worse and even though the numbers were not great, they could have been much worse.
Housing, Jobs and the Economy in General
Last Monday we saw an 8.2% jump in pending home sales and PMI came in slightly higher than expected. We also saw strong data from most of the retail sector giving those stocks a boost early in the week.
An unexpected jump in unemployment claims sent stocks lower in early trading last Thursday, but the broad markets recovered by the end of the trading day. Fed Chairman Bernanke offered testimony in Washington stating, “Policy makers must respond forcefully, creatively, and decisively to severe financial crises,” in reference to actions taken during the most recent financial crisis to avert another great depression. The Fed’s quantitative easing program has also ended.
Next Week’s Earnings Announcements
Monday – Alcoa (AA)
Tuesday - Intel Corporation (INTC) and CSX Corporation (CSX)
Wednesday - Yum! Brands (YUM) and JPMorgan (JPM)
Thursday – Advanced Micro Devices (AMD) and Google (GOOG)
Friday – Bank of America (BAC) and Gannett (GCI)
The current price-to-earnings ratio of the SPX is over 19x trailing earnings. This is a historically high number – higher than most of the past 5 years. Although, back in late December, that multiple was more than 23 and dropped all the way down to 17 during last earnings season. This number has been creeping higher as the index itself has moved from 1044 in early February to its current level of 1191, a 14% jump in a month and a half.
Earnings will dictate the indices’ future movements and expectations for the remainder of this season. If the announcements meet estimates, the p/e multiple should be just above 15x, with the SPX at its current level and based on analysts’ estimates. Expectations are for strong earnings growth this spring, which can also lead to big disappointments and subsequent sell-offs if expectations are not met.
These are some of my team’s observations from last week. What are you keeping your eye on as we move into earnings announcement this week?
Photo Credit: Mike Rohde
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