This is Earnings Season

The week ended January 31st 2014 had over 300 companies report earnings; companies such as Apple,Yahoo, Amazon, Google, Ford, Visa, and MasterCard reported revenue and earnings results. While mostly positive, the S&P 500, as a measure of the broad stock market, lost 20 points in what seems to be a consolidating phase after a few weeks of  retreating. Q4 earnings reports have been decidedly positive, with 64% of companies reporting results above Wall Street estimates and financials leading the charge by outperforming the expected 28% earnings growth. This would seem to be the fuel that equity markets need to make new highs. Alas, the S&P 500 has retreated over 2% in 2014 and brushed off record bank profits and consistent impressive earnings of companies. The market seems to be driven largely by macro factors in the early goings of this year which presents a prime opportunity for value stock pickers.

Investors must be cautious as the low hanging fruit may be low for a reason. For example, the tech golden child Apple reported a $0.50 beat off a $14.00 basis and saw the stock retreat over 10% to $500. An uninformed value investor would swoop in to buy a great company at a discount, but they would overlook the company’s failure to meet expectations for iPhone sales (its largest revenue producer and main driver of growth). While iPhone sales were at record levels (51 Million,) they were short of the 56 Million expected which sent the stock tumbling. The growth priced into the stock’s price had to be re-adjusted down causing the stock's tumble. Similarly, Yahoo inc. missed its top line expectation while reporting better than expected earnings, and the stock retreated.

While this investing environment allows investors acquire great companies for amazing value, we must exercise caution in the decisions because a company’s bottom line does not always tell the entire picture of its operations.

Look for cheap stocks with a solid balance sheet and a viable business strategy. exercise patience as the market takes a breather, then pounce once the timing is right. 

-F