Given how volatile and reactive markets have been to the turmoil caused by the trade war, the upcoming earnings season is sure to be chock full of fireworks!
Your Friday edition of What My System Says Today is about predicting which companies are poised to report increasing or declining earnings.
Green Zone Fortunes members have access to my Green Zone Power Rating system as part of their subscription. This allows us to size up a company’s long-term prospects — good or bad — and go well beyond Wall Street’s estimates in our quest to invest in the market’s “best” stocks (and avoid its worst ones).
Before we get into today’s screens, which show which companies are scheduled to report this coming week…
I owe you an update on one earnings report I highlighted last Friday…
Earnings Recap: CarMax Inc. (KMX)
Auto reseller CarMax Inc. (KMX) landed on my “bearish” screen last week as the average analyst estimate for the company’s earnings per share (EPS) this quarter was less than the previous quarter’s actual earnings, setting the stock up for a negative price reaction following the report.
Sure enough…
Yesterday, after reporting a miss on EPS before the opening bell, KMX shares dropped sharply and closed the day 17% lower, almost 5X worse than the S&P 500’s 3.4% loss.
In fact, KMX was the worst-performing stock in the S&P 500 for the day.
Here’s a look at CarMax’s negative trend since mid-February and the particularly poor reaction to its latest earnings report:
CarMax executives pointed to tariffs on auto parts as a significant headwind going forward during the quarterly call.
We believe this will be an increasingly common theme — that is, corporate executives pointing to uncertainty over the trade war to either “explain away” poor results or to warn of headwinds in the months ahead — as we get deeper into earnings season.
The global automobile market is sure to get shaken up, given the amount of international trade that typically happens, but this is only one of the many industries that are now flying blind into a murky future.
Now let’s look ahead to next week’s earnings reports…
Future Guidance Is Critical This Week
Again, while my Green Zone Power Rating system is not specifically designed to forecast a company’s results in a single quarter or predict investors’ reactions to them…
It does give us a 360-degree snapshot of the company’s strength and how the stock has been behaving recently. It’s a robust system that gives longer-term buy-and-hold investors a good gauge of the stock’s potential to beat the market over the following months and even years.
Of course, my data-driven rating system also “digests” all the new data coming out of a company’s earnings report and accordingly adjusts the stock’s individual factor ratings and overall ratings.
If you’re holding a stock through its earnings report, or even if you’re just watching a stock you’ve done some research on … you’ll want to know whether the company is more likely to report higher or lower earnings than it reported in the prior quarter. That’s what the simple screens I’ve constructed below can do…
It doesn’t always work this way, but over time, companies that increase earnings tend to get rewarded with strong price action and vice versa.
Let’s dig in first with companies that are expected to beat their previous quarter’s earnings numbers and thus are poised to trade higher if they succeed at meeting those expectations…
For this screen, stocks must meet four criteria:
- The stock is covered by 10 or more analysts.
- The average analyst recommendation is a “Buy.”
- It BEAT analysts’ EPS estimates for the previous quarter.
- The average analyst estimate for the current quarter’s EPS is greater than the previous one.
Here’s a selection of what’s on tap for next week:
Big banks usually kick off earnings season, and as you can see, Goldman Sachs (GS) and Bank of America (BAC) are due to report on Monday and Tuesday, respectively.
Wall Street analysts are expecting BAC to match last quarter’s earnings-per-share, while GS is expected to report an increase in EPS of $0.34.
That said, I believe any statements made by these banks’ executives about their expectations for the upcoming quarter and about the potential impacts of the trade war will be far more impactful.
We’ll also get sneak peeks at Corporate America’s expectations for the upcoming quarter in the material sectors via the “paint” company PPG … the U.S. health care industry, with UNH’s report … and the global pharmaceuticals and health products sector from JNJ.
The companies above are expected to deliver “positive” news, so it could spell trouble if they don’t…
We’ll be watching closely.
Now let’s look at the companies expected to report declining earnings next week…
Declining Earnings Are Certainly “Bearish”
My bearish earnings screen is simpler, mainly because Wall Street’s analysts rarely give stocks “sell” ratings, even when they’re rather obviously deserved.
For this screen, we’re only looking for two things:
- The stock must be covered by 10 or more analysts.
- The average analyst estimate for the current quarter’s EPS is less than the previous quarter.
In short, we’re looking for companies that are covered by a sufficiently large group of Wall Street analysts who collectively expect the company to report a quarter-over-quarter decline in earnings.
Here’s what this screen revealed for next week’s quarterly calls:
To me, United Airlines (UAL) sticks out like a sore thumb …
Last quarter, it reported EPS of $2.94, but that’s expected to drop to just $0.74 when the company reports on Tuesday.
That’s a meaningful drop, and it could certainly spook investors who see the U.S. airline industry as a bellwether for the economy, in general, and consumer discretionary spending, more specifically.
Keep in mind that Trump’s trade war began in earnest during the period UAL will be reporting on next week. That makes the company’s forward guidance even more important …
Delta Air Lines (DAL) made headlines this week when it withdrew its guidance…
If United Airlines were to follow suit, and if this more broadly becomes a trend … it will only work to further unravel investors’ confidence in the economy and markets ahead.
Whether those fears would be warranted or overblown is anyone’s guess at this point, but we should all be well aware of this issue and its potential to “spook” the market.
I hope you’ll get yourself prepared with a subscription to Green Zone Fortunes if you haven’t already!
Until next time…
To good profits,
Editor, What My System Says Today