All Eyes on Earnings - Your Money April 21st, 2023

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We will try to be short this week simply due to the avalanche of bell weather companies reporting next week the Q1 GDP and the PCE Price Index, the key stat followed by the US Federal Reserve. Stronger numbers will support the Fed’s notion of more hawkish policy stances along with additional rate hikes. No surprise, investors sat on the fence in anticipation or perhaps apprehension. Having said that, the earnings that have already arrived, for the most part have performed fairly well. We were not surprised by the solid performance of the mega banks last week, and this week P&P, the company that makes everything in the center isle of your drug and grocery store, reported a 4% jump in sales and 3% increase in EPS. Organic sales also rose 7% year over year which tells us, they are not having any problems raising prices. This leads us to believe next week names like Colgate, Pepsi, Coke, McDonalds, and Hershey’s will also report earnings beats judging from the empty shelves we see in our corner of the world.

And of course, Chevron and Exxon Mobile will report next Friday, and we expect good numbers from both. As for the big industrials, Boeing, GE, Caterpillar, and Honeywell, it is a wait and see approach for now, but they could present buying opportunities especially when history tells us the AI computers which run algorithms have frequently reacted incorrectly to the premarket release of earnings. Last Summer we jumped on Cisco after the stock dipped on the opening and allowed common sense investors an opportunity to buy a bell weather technology company on sale. Right now, we have our eye on several stocks that could see a temporary drop in the stock price.
Again, we need to be selective in this market, especially with the backdrop of rising interest rates cutting into future profits. Remember, earnings forecasts are based on model and built into the future price target, one must discount their numbers against the risk-free rate. One year ago, the risk-free rate ( 90-day Treasury Bills) were close to 0% and with the anticipated rate hike on May 3rd, it will be over 5%. If you are a company with a great top line number (sales) but no profitability, it must fund growth with borrowed money at a multiple of 5% or the additional release of more shares diluting your ownership structure. That could affect a lot of high P/E stocks right now. We are not saying Amazon is at risk, but at 75 times earnings, it needs a beat to support the stock price. On the other hand, the Street is looking for an acceleration of earnings in 2024.
Having said that, the S&P500 is trading at around 24 times and with interest rates at 5%, investors appear to be betting, the Federal Reserve will be forced to cut rates later this year. We would therefore prefer to wait for not just the earnings but management’s outlook for the balance of 2023 and hopefully some insight into 2024. We continue to be bullish on energy, industrial, healthcare and financials….with a big caveat on banks. Big financials will likely continue to get bigger, while mid size banks will be regionally dependent on economic growth rates and their credit portfolios. We would defer to actively managed ETFs in that space.
Beyond that, be sure to catch our latest Ocean Currents show where we debate the bull versus bear market outlook.
Stay safe and Happy trading.

Steve Bokor and the Ocean Wealth Team

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Steve Bokor

Steve Bokor

Portfolio Manager