Hotline Sample Report
This report is a sample for information purposes only. These recommendations are closed.
7/24/2017 9:55:00 PM Eastern Time
Corporate Growth Revival
This week looms large for corporate earnings after 97 (or 19%) of S&P 500 companies (and 13 Dow Jones Industrial Average components) have posted earnings that are on a blistering pace to shatter the record (using FactSet data going back to 2008) for the greatest percentage of companies beating Wall Street consensus.
Thus far, 77% of companies have posted revenue results better than expected against the record of 72% back in the second-quarter 2011 (2Q11).
To put this into perspective just how impressive this quarter has been thus far, considering the average sales beat, it has been 1.3% above consensus versus a trailing 12-month average beat of 0.5% and a five-year average beat of 0.5%.
It’s anticipated that the overall revenue growth is 5.0% versus 4.9%, coming into earnings season on July 30, 2017, as only three sectors are beating the Street:
Note: Our ‘Portfolio Approach’ currently is overweight in Information Technology and Industrials, and above average in Financials.
In addition to great top line execution, 73% of companies have posted earnings per share that beat consensus while only 23% have missed. Not only are companies beating consensus, but the size of these positive surprises is also well above historical levels:
Again, it’s technology that’s leading the way.
I would like to see margins expand more than they have. A key part of our decision-making involves direction and the pace of margins, particularly operating margins.
Right now, forward price-to-earnings (P/E) for the S&P 500 is 17.8, which is well above historical norms; 5-year average (15.4) and 10-year average (14.0); it is well-below tops that have presaged major corrections and crashes. The reality is this is still what many would call a “stock-pickers” market with various challenges for investors from earnings to valuations. Even great companies can have overvalued share prices while not-so-good/great companies can have an oversold stock price. To an extent, this explains the rotation we saw a couple of weeks ago.
That being said, with so many money and fund managers behind the eight-ball, momentum will still dominate as no professional wants to explain why they didn’t own the hot stocks. That’s a disingenuous game that has more to do with assets under management than actual performance. This is why so many have become self-directed investors in the first place.
This is the perfect time to remember that ultimately stocks move on earnings while it’s treacherous -we will have a couple of disasters – and this is also the best time for true price/value discovery.
This is going to be a crazy week trying to keep up with all the earnings announcements and other data that will influence the market.
I’m seeing more upgrades in the brick and mortar space, like Michaels (MIK) this morning at JP Morgan. But this doesn’t extend to Hibbett Sporting Goods (HIBB), which warned this morning and is being crunched down 21%. Keep in mind, this is a record-breaking earnings season thus far; and no matter what how the machines and algorithms react, we are going to dig deeper and sift through the numbers.
Long Idea: Arista Networks, Inc. (ANET) @ $152.50
BACKGROUND: Arista Networks, Inc., incorporated on December 2, 2011, is a supplier of cloud networking solutions that use software innovations to address the needs of Internet companies, cloud service providers and data centers for enterprise support. The Company develops markets and sells cloud networking solutions, which consist of its Gigabit Ethernet switches and related software. The Company's cloud networking solutions consist of its Extensible Operating System (EOS), a set of network applications and its Ethernet switching and routing platforms. The programmability of EOS has allowed the Company to create a set of software applications that address the requirements of cloud networking, including workflow automation, network visibility and analytics, and has also allowed it to integrate with a range of third-party applications for virtualization, management, automation, orchestration and network services. EOS supports cloud and virtualization solutions, including VMware NSX, Microsoft System Center, OpenStack and other cloud management frameworks.
SKINNY: This stock is more volatile than our usual Hotline ideas. We see the stock growing to $200 in the long term.
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