As we make it to the middle of the first week of earnings, some interesting trends are developing, some a bit alarming, some decent. The overall market still looks solid with the S&P500 (SPY) now up over 6% since the lows on April 2. The Dow Jones Industrial Average (DIA) held the 200 day moving average, almost to the penny. Technically the averages, including the Nasdaq all have solid looking bounces off of support, even if the 50 day moving averages all still point down. So the good news is earnings is bolstering the market overall, and we have a lot of companies left to report. The bad news is where the weakness is. Let’s look at what we are watching carefully as this unfolds.
These aren’t holding up so well, even though they have had decent earnings, and are not all that expensive. The problem seems to be the makeup of revenue and earnings. Most companies reporting so far (JPM, C, GS, BAC, and MS) have had an outsized amount of profits and revenues from trading, and most investors view trading revenues as more of a one-off. In fact, volume on the NYSE has been below 600 million shares for a lot of April. Citigroup (C) has now traded down every day since the print last Friday. The stock action is directly at odds with what the CEOs commentary has been as well. Jamie Dimon and Lloyd Blankfein were both constructive on the economy. We will see, but we need the financials (XLF) as leaders.
FAANG vs. old tech
Newsflash – old tech is losing. IBM is getting smoked today- down 8%. Oracle (ORCL) had a tough go of it when they reported in mid-March as well. The NYSE Fang+ Index meanwhile is up almost 12% since the lows. Only one FAANG has reported so far, but it was fantastic. Netflix (NFLX) had solid numbers that drove the stock to new highs. My style is not to buy at the highs, but the company will still be growing earnings 60% next year. Even with the various problems we have discussed pertaining to Facebook (data stealing), Apple (cycle problems), and Amazon (angry Trump), FAANG has reasserted itself as a leader. And keep in mind, that at least in tech, value is not winning over growth.
Semis, Comm Equipment, and Storage
We like to look to these sectors as the canaries in the coal mine. Often they are harbingers of what is to come in the market. And earnings ain’t looking so great so far. Lam Research (LRCX) is down 5% after posting a solid quarter. The problem is EPS growth goes to zero for calendar year 2019. So the cliff is coming. And if semiconductor companies are slowing equipment orders…maybe their growth is slowing as well. We will see when the chipmakers start reporting. Comm Equipment is having it tough too. Goldman Sachs downgraded Juniper (JNPR) today, and that stock is down 17% since January. These stocks are often more seasonal than people think, but there seems to be a slowdown in the space. Add that to the woes that Acacia (ACIA) from being blocked selling to ZTE, and the space is either getting dirt cheap, or there is a pause ahead of 5G. Either way, stocks with exposure here seem risky. Finally, IBM said today that storage was weak in their quarter. That has possible implications for Western Digital (WDC), Seagate (STX), Netapp (NTAP), and even Micron (MU). So overall, small tech is not telegraphing good things into the summer.
This group is doing well out of earnings. Both Delta (DAL) and United (UAL) have done well since earnings. They are always pretty cheap, but UAL is up 5%+ today and still is only trading at 9x 2018e earnings for 16% earnings growth. Other transports are doing well too with CSX up almost 7% today as well. We have planes and trains, are automobiles next?
Net-net? The “market” looks ok. But small-cap and sometimes leading tech is troubling as is the financial pullback as a whole. Seems like value is four letter word as well (Valu?)