It's the Earnings, Stupid - Part 2

Last October—which feels like decades ago—I wrote a contrarian piece targeting those warning of a stock market crash of Depression-era proportions.  So long as earnings were good, shares in companies whose earnings were solid would remain on relatively firm footing. That was before Omicron, first reported to the WHO a month later in November, took the world and the market by storm. Still, no such calamitous collapse has occurred market and/or sector wide. True the Nasdaq is down 9 points from its high in November, but it has managed to fight off a major correction since the start of the year. 

The advice to focus on the earnings remains—and while stocks are mixed as of Wednesday, January 19, earnings are the one thing in this crazy market of crypto and China and commodities and tech and Russia and Covid-19 that equity investors can count on long-term. 

That said, I am not unaware that some stocks, like Microsoft (MSFT), have fallen and I am reminded of this each day as I watch my options, due to expire in April, fall precipitously. The stock is on the upswing, however, after falling to around $204 per share, MSFT is trading around $211 per share as of Wednesday afternoon. While I cannot champion any call options (I will hold mine but not buy more) MSFT shares are a no-brainer at nearly any—let alone this—price. The acquisition of gaming company Activision Blizzard (ATVI) set back Microsoft some scratch (roughly $69 billion, placing a 45% premium on ATVI’s shares). But the result—unsurprisingly—is that ATVI’s share price has risen over 25% on the news. 

A Good Bet for Microsoft? 

I think so. In 22005, the gaming industry posted revenues of $10.5 billion. The market was dominated by makers of consoles and hardware, like Sony (SONY), which makes the famous PlayStation. Fast forward 15 years to 2020, and gaming has become a massive multi-platform market generating revenues of over $155 billion. As gambles on the “metaverse” go, MSFT’s bet on Activision and gaming will prove one of the wisest bets. SONY stock fell hard on the acquisition news—the biggest tech acquisition in history.

Back to Earnings…

Thus far, about 8% companies in the S&P index have reported. More will be reporting over the next three weeks. These earnings look good so far; the aggregate earnings result has been almost 6% above expectations. This is what the market needs. When it comes to tech, a slipping sector since its height in November, investors should follow stocks whose reports are imminent closely:  Tesla TSLA, Apple AAPL, Alphabet GOOGL, PYPLPYPL, and Netflix NFLX. 

Of these, I expect PayPal’s earnings to serve as a catalyst for a long-awaited rise in its share price. I am by no means alone: The 43 analysts offering 12-month price forecasts for PayPal Holdings Inc have a median target of 265.00, with a high estimate of $345.00 and a low estimate of $172. Of the five big tech names reporting mentioned above, PYPL is my favorite. I also like Airbnb ABNB at these prices and expect the company to post strong earnings this year. The company will report at the end of February: I’d get in before then. 

Outside of tech, strong earnings have already staved off a market selloff. This week, some strong earnings from Procter & Gamble topped expectations, and raised its outlook. Shares popped 4% and—more importantly—showed the market that, despite higher inflation, its margins remained intact. Hopefully this bodes well for others.

UnitedHealth UNH, a stock that I like despite being a very unsatisfied customer, rose 1.45% on top and bottom beats. This is a stock with solid long-term potential. Get in now and maybe when revisits its late December high of $502 per share, you can afford to see a doctor.

As far as upcoming earnings, in addition to the tech I have mentioned I will be looking at Microsoft, which reports on January 25. I’ll be holding my breath. After all,  I don’t have any other options—and I’m not about to buy more.