Tuesday, July 8, 2008

Can Earnings Jump Start This Market?


Earnings season kicks off today. As usual, Alcoa (AA) leads off. I'll talk about them in a minute. But first, lets look at the previous earnings cycle. We were coming off a major market drop (the march Bear Stearns low), so sentiment was poor. Estimates were dropping as analysts expected companies to announce massive layoffs following the December jobs report. But a lot of earnings surprised to the upside.

A couple of things are virtual certainties this earnings season. First, companies that rely largely on transportation are going to be weak. UPS and FEDEX. We know the story here, as they've been issuing multiple profit warnings. Second, expectations will be low. Does anyone remember Google last quarter? The analysts and pundits were enjoying ripping on the "untouchable Google" coming into earnings, saying things like "growth is slowing", "paid clicks will be way down", and "time for Google to come back to earth." Well, Google blew the doors off. Stock rallied fiercely. My point is that be careful about getting to dour with sentiment. The media can lead us into this false sense of how terrible or great EVERYTHING is. One of my favorite quotes is "Its never as good as they say it is and its never as bad as they say it is either." Keep this in mind.

So take a look at today's lead-off batter (sorry I've been watching too much baseball) Alcoa (AA). You've got a company in the midst of potentially being bought out by Brazilian super-miner Vale (RIO). Their earnings estimates have been cut pretty consistently over the past few weeks. So has the stock price. A lot of downside has been priced into the stock, but there are some reasons to own it, and the potential buyout is one. Another is the fact that the market for metals is still pretty strong right now. I don't like to "game" earnings, as its too unpredictable, but Alcoa is fairly attractive right now.

Stocks are oversold. Although I'm still holding some short positions, I'm considering cutting them.

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