Earnings Season

4/12/15

Earnings season kicks into high gear this week with most of the big banks set to report throughout the week. JPMorgan and Wells Fargo both report Tuesday morning, followed by Bank of America on Wednesday and Goldman Sachs and Citibank on Thursday. While I own Wells Fargo, I’m very cautious on the banks right now. Although the Fed is expected to begin raising interest rates later this year, it’s going to be a long time before banks start profiting from a steeper yield curve (when the spread between long-term and short-term interest rates widens). All of these bigger banks benefit from rising rates so until that happens, I don’t see a lot of growth in the financials. However, with that said, there are two big positives for a lot of these banks, the first of which is a housing recovery. Lenders like Wells Fargo and JPMorgan are going to be the big winners of low mortgage rates and I expect to hear both companies remain optimistic about lending. The homebuilders and housing related stocks have all been on a tear this year and Wells Fargo and JPMorgan should confirm the housing market is doing just fine. The second positive among the financials is that most of all the big lawsuits should be out of the way right now. That was a major problem for the likes of JPMorgan, Citibank, BofA and Goldman Sachs, so now those banks can focus on the future and not have to worry about government intervention. I have the financial sector rated as a “hold,” but if you have to buy one because you want exposure to the industry, stick with Wells Fargo or Goldman Sachs. Wells is best positioned to take advantage of the housing recovery and pays a 2.60% dividend and Goldman Sachs is the best bet to take advantage of another year of strong M&A action.

Delta reports earnings on Wednesday morning, and if you are looking to get into an airline stock and want to hold it for the long-term, this may be your best shot. While Delta is best positioned to take advantage of lower oil prices by owning their own refineries, they are also being negatively impacted by a stronger dollar. They have more international exposure than names like Southwest Airlines and Spirit, and in the last couple months, have reported weaker-than-expected passenger revenue BECAUSE of currency headwinds. I think a lot of the negativity is already priced into the stock, with Delta being down 15% from all-time highs in January. If the stock continues to sell off because of weak near-term currency guidance, I think you pull the trigger around $40.

On Thursday, along with the banks, healthcare giant, UnitedHealth Group (UNH) will report. I bought UnitedHealth last week in anticipation of another really strong quarter. The healthcare stocks have been on fire the last couple years, and I expect that to continue. There is a lot of consolidation in this sector and a lot of future growth. UnitedHealth just announced the acquisition of pharmaceutical benefits manager, Catamaran, which should boost future earnings even further. The company has also kept a floor under the stock price with strong share buyback programs and a 1.26% dividend.

Also on Thursday, Schlumberger (SLB), the largest oilfield services company in the world, reports earnings, and will be an important one to watch. The stock is well off the lows in mid-March, but is still down 25% from its 52-week high. I am a firm believer that oil has bottomed and that some of these energy stocks can, and should be bought. I am interested to hear what the company says about the future of oil prices and to see if margins are stabilizing. If you are looking for exposure to energy, I would be a buyer if the stock pulls back to $85 or breaks out above $92. 

Lastly, on Friday, industrial giants, Honeywell and GE report earnings. GE, formally where money went to die, just rallied about 11% on Friday after announcing they are ridding themselves of almost all of their GE Capital division. Going forward, only 10% of all revenues will come from their financial division, but only time will tell whether they have made the right decision or not. While GE has been a good company, the stock has been horrendous. If you have owned GE since before 2008, you are likely STILL under water on your position. The good news on the stock is that they have announced a $50B buyback, which will act as big support, along with their 3.25% dividend. My advice is to stay away from General Electric, and stick with Honeywell (HON). The stock has been on a tear lately, rallying almost 60% over the last two years, and outperforming GE by about 25% over the last three years, despite GE’s 11% rally on Friday. Honeywell sports a 2% dividend, has a strong balance sheet, and great management team lead by CEO, David Cote.

Earnings are going to come fast and as I wrote a couple weeks ago, expectations across the board are very low. Most investors also expect guidance to be weak because of the strong dollar, but I believe a lot of the bad news is already priced into some of these stocks, and more of the risk is to the upside. I expect the rally in the dollar to cool off slowly and move lower, so currency headwinds will be less of an issue long-term, so use short-term weakness in these stocks to buy them.

My current positions: Long Gilead Sciences (GILD), Starbucks (SBUX), Macy’s (M), Facebook (FB), Whole Foods (WFM), Wells Fargo (WFC), General Motors (GM), ConocoPhillips (COP), Kinder Morgan (KMI), Time Warner (TWX), Palo Alto Networks (PANW), Twitter (TWTR), NXP Semiconductors (NXPI), Lockheed Martin (LMT), Darden Restaurants (DRI), Celgene (CELG), Mobileye (MBLY), Jack In The Box (JACK), Under Armour (UA), Masco (MAS), United Rentals (URI), Regeneron (REGN), Restoration Hardware (RH), Apple (AAPL), Sanderson Farms (SAFM), and long UnitedHealth Group (UNH) CALLS and Mobileye (MBLY) CALLS.

Jeff Lewison