Appleishish Earnings - Your Money January 28th 2022

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Take a look at the economic stats below, go to the earnings calendar at Yahoo Finance and then fasten your seatbelt for what should be a bumpy ride next week. If there is a hint of inflation in the system, bond investors could hit the sell key driving 10-year bond yields over 1.80%, causing collateral damage in the stock market. In particular, we are seeing a re valuation of high multiple stocks with no earnings on the horizon, sending them down the proverbial elevator shaft. In some cases, even the ones with earnings have still been taken to the woodshed. Tesla down 15% and Netflix down another 23%... this week.

On the other hand, Corporate Canada and Corporate USA are still in great financial shape. Consumers continue to drive economic activity, but the “green revolution” may have caused longer term unanticipated consequences that will benefit Canada. Chevron, arguably one of the best run integrated oil companies in the world, reported an earnings miss due to a too rapid shift away from traditional exploration activity shaped by investor activism and lower global energy prices. Major energy projects take years of planning and execution before production comes online and if a project gets shelved, it can take years before they get revived if they get revived at all. Just ask Enbridge and TransCanada Corp and see if they are willing to spend another billion dollars to get a “NO” out of Ottawa. On the plus side, companies like CNQ, Suncor and Meg Energy are laughing all the way to the bank on assets that can produce consistently for decades to come with little to no future demands on their capital structure. But I digress.

In my opinion, too many stocks were pummeled this week for no real reason. Their business models are intact, their sales continue to grow at accelerated rates accompanied by just a tiny bump in interest rates. Sure the short end of the interest rate curve hovers near zero, but if it jumps to 1.5% over the next 18 months, will it really stop their growth path? For under capitalized ones the answer might be yes. But for those companies with hundreds of millions in cash, they will likely reach profitability or get taken over by bigger companies wanting to increase their market share. Last week, Microsoft announced a takeover of Activation Blizzard for $68.7 Billion Dollars. ATVI stock jumped from $65 to $82. Sounds like a lot of money until you realize Microsoft is sitting on $125 Billion in Cash on its balance sheet. Why build when you can buy may be the cry for 2022.

Having said that I would not go bottom fishing right now, because we don’t know how Wall and Bay street will react to rising interest rates in the short run. You might consider it for strong companies that get tarred by the same brush as weaker ones. If one drug companies has an earnings miss, and others drop in sympathy, consider nibbling on bystander. That would include financial service companies, industrials, consumer product companies and energy companies. For technology, I would stick with ETF’s like the Nasdaq 100 or CI Tech Giants Covered Call in lieu of individual names unless you have a growth bias to your personality and financial situation.

If we look at the marquee names for next week, keep an eye on Exxon, Alphabet (Google), Facebook (now Meta), Ford and Amazon. If they perform half as well as Apple and Visa this week, then expect a bounce next week.

On the other hand, you might not want to look at markets next week, especially if this week is a guide. We have seen some of the biggest drops followed by the biggest rallies all in the same day since March/April 2020. Again in my opinion, I think we are seeing a rotation away from growth and into value. Once we are through earnings season we may also see a rotation into small/mid away from large cap. Plus we are looking at European and Asian markets for an entry point. US markets are down 7% to 10% so far this year whereas European indexes have only fallen around 3%. If they join North American Indexes over the ensuing weeks…

Happy trading and stay safe out there.

Cheers Steve.

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Steve Bokor

Steve Bokor

Portfolio Manager