The Week Ahead: Market Independence Day!
Posted
Jun 27 2008, 07:59 PM
by
Andrew Horowitz
Rating:
It’s a whole new ball game. With the dollar’s historic lows and oil breaking about $140 per barrel, it seems obvious that as investors, we need to revisit the basic rules when it comes to risk protection and price targets. As we saw with last week’s romp on the market, the broad-based sell off was a signal that we may have finally approached the proverbial straw that broke the market's back. What is next and will oil finally come down from the stratosphere? (see Oil index set to fall?)
Whether it’s transportation costs or materials that make up the basis of the manufacturing process, companies are going to need to be looking for cost-cutting strategies in order to maintain profitability.
Unless you have a portfolio chock full of short positions and maybe a smattering of energy-related stocks, you have had a lot to be worried about. The most troubling part of this earnings season is that we have not seen a more publicized account showing that companies are having a difficult time reaching lowered estimates. Perhaps it is time to reflect on goals and pay attention to downside risk in an environment that is showing a much greater potential for breakdown that a breakout.
Next week should be interesting as we see the earnings releases from these select companies.
Monday, June 30
Robbins & Myers starts the week with a fresh look at profits from the oil and gas exploration industry. As you would imagine, shares have been progressing higher over the past several years. Long-term earnings per share growth rate stands at 28% but in recent years the company has racked up some extraordinary increases. With little debt and a high level of institutional ownership, it is difficult to comprehend how this company won’t beat earnings projected to be $.58 per share on $190 million of revenue. The real direction of the stock’s future will be found in the outlook, as it appears that the earnings growth rate is slowing.
Next up is H & R Block…the company that brings a frown to everybody’s face during tax season. While you may not like this company for its relationship with taxes, you should have more negativity about their foray into the mortgage business. Shares have been moving wildly over the last several months taking shareholders on a 50% ride up and down. The earnings per share growth rate is slowing dramatically and even though shares have been somewhat stable over the last few weeks, the 37% debt load and the potential for a bomb to drop when they reveal their next earnings could be damaging to the share price. Remember that WL Ross & Co. recently bought the mortgage loan servicing business for $1.3 billion. With that in mind, First Call is reporting that analysts are predicting a $2.03 earnings per share for the period on $2.5 billion of revenue. Note: the EPS for this quarter may include a substantial one-time component and is not comparable to past results.
Tuesday, July 1st
Constellation Brands is one of those companies that could do really well during an economic slowdown. Put them in the same category as weapon's manufacturers, produces of alcoholic beverages and psychologists. Even so, shares have been on a confirmed downtrend over the past several months and have recently broken through their 50 day moving average. The company has a huge debt component and earnings have been declining steadily over past several quarters. To summarize: from a growth perspective, this company is not making the grade. Fundamentally it looks weak as do many of the technical indicators. The earnings per share estimate of $.31 on $806 million of revenue could be a difficult target to meet as consumers have been scaling back on most discretionary products. If you’re a shareholder, I would consider looking at some downside risk protection and if you all are considering investing in shares…don’t.
In the same category of stocks that could do well during recessionary times are those companies that can provide education and job relocation services. As more people are laid off, many will look for other opportunities and as there will be slim pickins'. The result will have many looking for ways to enhance their resume and job skills once their unemployment benefits run out. Unfortunately this isn’t a laughing matter but does show potential for a company like Apollo Group. Even with this in mind, shares have been dicey into a recent consolidation and have been riding their 50-day moving average into expected earnings of $.78 per share on $806 million of revenue. Add the fact that the company’s president Brian Mueller resigned suddenly last week and investors should pay close attention to the $46 support line.
Wednesday, July 2nd
In tough times, shoppers get frugal! This is the hoped for reality for Family Dollar looking to achieve $.40 of earnings per share on $1.7 billion of revenue. Over the last several months, shares have pulled out of a severe downtrend and have been consolidating towards both the 200 and 50 day moving averages. As EPS growth is nonexistent and the outlook for the industry is bleak, shareholders have have a lot to decide when looking this holding. Remember that over the years, the company has grown to 6,400 stores in more than 44 states just by selling look-alike products at cheap prices. Even so, the strengths and infiltration by Wal-Mart and other mammoth retailers have taken its toll on the entire retail industry and could continue to do so for the foreseeable future.
You have one, I have one and probably everybody that you know has one. Of course I am talking about a can of WD-40 lubricant. It solves almost every problem and helps provide a smooth flow to almost any mechanical device. Sadly, not so with the stock it seems. The high cost of petroleum has taken its toll on this company that provides all-purpose lubricants, household products and heavy-duty hand cleaners. Earnings have been all over the place and unless something miraculous happens, it will be hard to believe that the recent run-up in the price of oil is not going to hurt this quarter’s earnings expected to be $.47 a share on a paltry $82 million of revenue.
Thursday, July 3rd
With no relation to the 40-year-old virgin, Corel is planning on releasing its earnings to an uninterested audience. Once a key player in the word-processing and digital imaging software industry, this company has been rendered impotent by competitor Adobe. While earnings are expected to be $.35 per share from $66 million of revenue, I think that a discussion about Adobe would be much more interesting.
In fact, everything about Adobe makes me want to take my camera and start shooting, build a website and paint the world a million colors! If that’s not possible, I would be satisfied with entering a long position in this fine company that has a bright outlook and relatively no competition. Since they purchase Macromedia and have effectively cornered the creative market, shares are starting to look as though there is a potential to break out when, and if, the market begins to cooperate. The reason is simple: earnings per share growth has been extraordinary, debt is nonexistent and even though shares recently sold off, it is showing a definitive bullish pattern and is now consolidating on its 200 day moving average. The fundamentals are strong and the outlook bright for this company and at this time, is probably one of the better positions that you could consider. (Sorry Corel for the upstaging)
Friday, July 4th is Market Independence Day!
Take my advice: take the day off!
Related reading:
Looking at the week ahead: June 16-20
The Next Home Run Stock
4 Stocks to fight inflation's bite
School stocks that win when jobs go bad
Waitress is $1 million stock guru - WD 40
Disclosure: Horowitz & Company clients do not hold positions in securities mentioned as of the publish date.
