You know that mustache you grew to raise awareness for prostate cancer as part of the “Movember” movement? Well, it just crushed Procter & Gamble’s (PG) business.
At least, that’s what the executives want us to believe.
Last Friday, Chief Financial Officer, Jon Moeller, tried to pin the company’s disappointing results for its grooming business on the fact that four million men ditched shaving for a month.
Puh-lease!
What’s next, Jon, the dog ate your homework?
I don’t expect this to be the last excuse offered up on an earnings call, either.
Thanks to the record cold temperatures that much of the country has been enduring for a solid month, I’m sure that the weather will get blamed a few times, too.
Why bring any of this up?
Because we’re about to get bombarded with earnings. This week alone, over 225 companies are scheduled to report results.
While I want you to be on the lookout for the most laughable excuses (please submit your candidates for consideration here), I also want to make sure that you understand why individual earnings reports are more important than they’ve ever been this entire bull market.
In the process, I promise to share one corner of the market that’s poised for outsized gains. Even if the broader market continues to stumble. So let’s get to it…
When it comes to discerning the future direction for the stock market, I typically tell you to focus on the averages. Specifically, the average percentage of companies that beat earnings expectations.
The higher, the better. After all, stock prices ultimately follow earnings.
So far, so good…
As Bespoke Investment Group notes, 64% of companies have beat expectations this quarter, which puts us on pace for the best quarter in nearly three years.
Under normal circumstances, I’d be ecstatic about the early reading. Not this time around, though. And that’s simply because the averages don’t matter this quarter.
As Chris Verrone at Strategas Research Partners notes, correlations among S&P 500 stocks rest at their lowest level in over a year.
That means stocks aren’t moving in unison anymore. Instead, companies are going to rise or fall on the merits of their individual fundamentals.
Or, more simply, we’re in a stock picker’s market. And we need to make sure we pick wisely.
You see, companies missing expectations are getting throttled, dropping an average of almost 4% on their report days.
Big misses, like Sallie Mae’s (SLM), are prompting double-digit selloffs.
Meanwhile, companies reporting better-than-expected results are responding to the upside. Like server technology company, Super Micro Computer, Inc. (SMCI).
Not only did it beat earnings expectations by tripling profits in the last quarter, it raised expectations for the next quarter. Shares jumped more than 24% on the news. And therein lies the opportunity for us…
As investors scrutinize individual company results, earnings season is yielding clear-cut losers and winners. In such an environment, we need to tip the odds in our favor by focusing on the corner of the market with the highest probability of winners.
And that distinction belongs solely to the technology sector.
There’s no arguing with the data…
According to FactSet, a chart-topping 85% of technology companies have reported better-than-expected earnings and sales this quarter.
Not only that, but the technology sector is reporting the largest increase in earnings growth out of any sectors.
Bottom line: In this jittery and excuse-laden market, companies in the technology sector keep putting up impressive profit growth. That should translate into big profits for investors, too. So keep betting big on tech.
Ahead of the tape,
Louis Basenese
About Wall Street Daily
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Wall Street is lying to you. The talking heads on television are lying to you. Your banker is lying to you. Your local Congressman is lying to you. Even your own broker is lying to you (mostly because he’s being lied to).
Consider: Behavioral science tells us that bankers and politicians are lying to us 93% of the time. And that Wall Street is 13 times more likely to tell a lie than the truth.
They win and we lose because our brains have been conditioned to cooperate in their con game.
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Ahead of the tape,
Louis Basenese
Chief Investment Strategist
