A Titanic Earnings Season
The markets rallied sharply last week in anticipation that things are starting to get better. And, admittedly they are … where the pandemic is concerned.
According to the Centers for Disease Control and Prevention (CDC), the outbreak is finally stabilizing across the U.S. Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, believes that the U.S. could ease travel restrictions as early as next month.
This is all good news. It means that life will return to normalcy relatively soon. However, this is just the tip of the pandemic iceberg where the U.S. economy is concerned.
This week marks the beginning of what’s possibly the most important corporate earnings season that many investors will face. An earnings season of Titanic proportions … if you will.
In the past two months, nearly every major U.S. company has issued a guidance warning revolving around COVID-19. General Electric Co. (NYSE: GE), Ford Motor Co. (NYSE: F), Apple Inc. (Nasdaq: AAPL), Walmart Inc. (NYSE: WMT), etcetera, etcetera…
Right now, Wall Street is fully prepared for a $#!% storm when it comes to corporate earnings for 2020’s first quarter. What it isn’t prepared for is guidance for the rest of the year and beyond.
“It’s been remarkable to watch markets just climb higher and higher,” Emily Roland, co-chief investment strategist at John Hancock Investment Management, told The Wall Street Journal. “We haven’t really seen markets reflect the full extent of the damage that coronavirus is having to corporate profitability.”
Right now, analysts project a 9% year-over-year decline in corporate earnings for all of 2020, according to data from FactSet Research Systems Inc. (NYSE: FDS). That’s a major shift from prior forecasts for 9.2% growth for the year. And it could get much worse.
“My guess is somewhere between a half and three-quarters of analysts have yet to take a knife to their earnings [estimates] because they don’t know what knife to take to them and how deep to cut,” said Nuveen Chief Equity Strategist Bob Doll.
With the start of the first-quarter earnings season just hours away, we’re about to find out.
Several years ago, while walking with our two children, my wife slipped on a patch of ice and shattered her ankle. In an attempt to keep our kids safe, she tried to remain standing on that ankle and keep walking. She’s always been one to push through the pain. She’s a stubborn one, and I love her for it.
The surgery took two hours and included a box of hardware that even Home Depot Inc. (NYSE: HD) would be proud of.
But, while patching up my lovely wife took mere hours, the rehabilitation needed to return to normal lasted roughly a year. It turns out that trying to stay on her feet did more damage to her tendons and muscle motor control than doctors initially realized.
Right now, Wall Street finds itself in a very similar situation.
In March, the pandemic shattered the U.S. economy. The Federal Reserve, the U.S. government and the Department of the Treasury all provided emergency assistance, employing their own exceedingly large box of “hardware” to fix the problem.
Relieved investors tried to stay on their feet, encouraged by the lowest stock prices seen in years. The government’s surgery was over. Everything should be fine now, right?
But, as with my wife’s ankle, the U.S. economy won’t be fully healed anytime soon.
This earnings season will likely uncover quite a bit about how extensive the economy’s “tissue” damage really is. It will take months of therapy before we see anything like the pre-pandemic bull market.
And when that truth finally comes to light — likely within the next couple of weeks — investors are in for a rude awakening.
The Good: 5G Can’t Melt Steel Beams
Apple is finally ready to take a bite out of the 5G market.
According to the infamous “people familiar with the matter,” Apple is rolling out redesigned iPhones with 5G capability this year. There’s a total of four new iPhones reportedly in the making: two to replace the flagship iPhone 11 Pro and Pro Max models, as well as two low-end models to replace the iPhone 11 base model.
The new phones will reportedly forgo the 11’s curved screen design in favor of flat stainless steel edges — a more iPad Pro-like design, according to the people who shall not be named.
The leaked info goes on about the iPhone designs more in detail … but, honestly, aside from the 5G functionality, the only real info of note is that there will be a bump in processing speed. Again, not a big shocker. But it does put the iPhone on track for more augmented-reality content and boosts the potential for artificial intelligence implementation in the devices.
I guess we could distill this Apple news down to “5G iPhones Coming! (Allegedly),” because that’s really the only major change in the new iPhones. An expected change … but a welcome one, for sure.
Oh, and no, 5G does not cause COVID-19. Just stop with this nonsense, please.
(Editor’s Note — Not sure where to start with investing in 5G tech? Click here now!)
The Bad: Choppy Waters
Great Stuff reader David R. asked us over the weekend: “What about the class action lawsuit against CCL? What is that going to do to the stock and dividends?”
In case you weren’t aware, a class-action lawsuit was filed recently against Carnival Corp.’s (NYSE: CCL) Costa Cruises subsidiary. The claim alleges that the company failed to warn passengers about potential exposure to COVID-19, and that Carnival failed to take appropriate precautions.
Given that Carnival has faced several of these class actions before — most recently involving robocalls — I don’t think the lawsuit by itself is that much of a concern for investors.
However, the CDC last week extended its “No Sail Order” for all cruise ships for an additional three months. Combined with a recent offering of 71.9 million CCL shares, this No Sail Order could be very problematic for Carnival investors — especially since the company was left out of the U.S. government’s $2 trillion bailout package.
So, I don’t think the class-action suit is a major problem right now. Carnival has much bigger fish to fry — like just trying to stay afloat.
The Ugly: AMC’s Rocky Horror Show
I hope you’re not waiting with antici … pation for movie theater stocks to come back. Nothing short of a time warp will return this industry to normal after the pandemic shutdown.
If you want proof, look no further than industry bigwig AMC Entertainment Holdings Inc. (NYSE: AMC). The company’s silver screens have been dark since mid-March due to travel restrictions and quarantine orders. As a result, AMC reportedly contacted the law firm Weil, Gotshal & Manges over the weekend to explore a potential chapter 11 bankruptcy filing.
This morning, analysts at both MKM Partners and Loop Capital downgraded AMC shares, citing a potential bankruptcy. Loop cut AMC to hold, while MKM says to sell the shares.
“Based on our view that theaters will be closed until at least August and our belief that AMC lacks the liquidity to stay afloat until that time, we expect the company will soon be faced with filing for bankruptcy,” MKM said in a note to clients.
If we’re being honest here, the movie theater model was already headed to the graveyard.
The companies make more money off of concessions and add-ons than actual movie tickets. Furthermore, direct-to-streaming releases of blockbuster films is already happening at Netflix Inc. (Nasdaq: NFLX) and Amazon.com Inc.’s (Nasdaq: AMZN) Prime Video.
Now that the major movie studios are getting a taste of that sweet, sweet direct-to-streaming cash without the silver screen distribution costs, the industry may never be the same again.
Today’s Chart of the Week comes courtesy of Earnings Whispers. You can see that there are quite a few major banking names on this week’s list, including JPMorgan Chase & Co. (NYSE: JPM) and Bank of America Corp. (NYSE: BAC):
But the real story on the U.S. economy will come from names like Bed Bath & Beyond Inc. (Nasdaq: BBBY), Fastenal Co. (Nasdaq: FAST) and J.B. Hunt Transport Services Inc. (Nasdaq: JBHT). So, while the mainstream financial media focuses on banking giants, keep your eyes peeled for retail, manufacturing and transport earnings and guidance.
Remember: Great Stuff will be here to help make sure you don’t miss those important reports!
Great Stuff: Sleep on Your Toes
If you’ve followed Great Stuff the past few weeks, you won’t be caught off guard when the dogs of the Dow start howling. And if you’re the bargain hunting type, the time will soon come to start prowling.
When you’re on the Street, you’ve got to be able to pick out the easy meat with your eyes closed.
When volatility hits and stocks trade for pennies on the dollar, that’s your time to strike … when the moment is right without thinking. And you don’t have to keep one eye looking over your shoulder … as long as you hold solid, well-run companies, that is.
That’s why you need a guide … a way to keep from going hog-wild in this pigsty. You need Banyan Hill’s own Charles Mizrahi.
Instead of seeing stocks as just heaps of data or wiggles and jiggles on a chart (as some folks do), you’ll see how to spot bona fide game-changing businesses. In fact, Charles’ approach has given him runs where he picked 36 stocks in a row that went up 50% or more!
Until next time, be Great!
Editor, Great Stuff