Skip to main content

So who do we listen to? Management or the stock market pundits?

The first quarter earnings season is pretty much wrapped up and investors, with their short memories, consider it ancient history.

With markets in turmoil, the question is whether we are seeing a correction or something worse. As stocks struggle with their 200-day moving averages, it is clear that we don't quite have an answer yet. Certainly the blogosphere is lit up with bearish declarations while bulls, less exuberant than before, keep a worried eye on the charts.

Looking for guidance --

One clue left over from earnings season may help us get closer to determining the future state of the stock market. Whereas earnings are historical numbers, out of date the minute they are released, company guidance is forward looking and provides the best assessment management has of the coming months.

I have been collecting earnings, revenue and guidance data for this earnings season and have amassed a information on over 2000 companies. The following table provides the detail on guidance broken down by industry sector.

table of management guidance by stock market sector
(Click table to view larger image)

Here are some takeaways from the data presented above:
  • Technology companies were most willing to provide guidance. Hopefully, this means many of them had clear visibility.
  • Technology companies also comprised one of the sectors that had the most instances of Upside guidance based on the percentage of companies in the sector that offered any guidance at all.
  • The Capital Goods sector actually had the best result in terms of highest percentage of Upside guidance at 37% with a respectable total of 47% of sector participants offering guidance. This sector includes companies like the automakers (Ford, Honda, etc.), Lockheed Martin, McDermott International, Boeing, homebuilders (Beazer, Hovnanian), Alcoa, General Dynamics and many more.
  • Looking at the consumer sector, there is a mixed picture. Though the Consumer Services sector has only a modest 14% of companies providing upside guidance, the Consumer Non-Durables sector is reporting 27% and the Consumer Durables sector is reporting 13%. This suggests the U.S. consumer is regaining some strength though he/she is still a bit wobbly.
  • The Finance sector remains one of the least optimistic sectors with a relatively small percentage of companies providing upside guidance and the largest percentage of companies providing downside guidance.
Overall, 23% of companies offered Upside guidance based on the total number of companies that offered any guidance at all. A mere 9% of companies offered Downside guidance.

Conclusions --

All told, 40% or the companies in my database offered guidance.

In general, I find it hard to believe that we are headed for another bear market when nearly a quarter of those companies that offered guidance are saying the outlook appears to be better going forward. On the flip side, it is hard to be too negative when only 9% of them are expecting their businesses to get worse.

While it is true that some managements may sugar-coat guidance in order to give their stock a short-term boost, eventually analysts and investors will see the true outcome. A stock that falls short of elevated expectations tends to plunge further than a stock that merely meets low expectations.

So short of another black swan economic event (a new Korean war, perhaps? the U.K. defaults?) I tend to believe that it is reasonable to take the preponderance of positive guidance as a sign of better times to come.

Correction or bear market? So far I'm leaning toward correction and considering it a buying opportunity.

Comments

Popular posts from this blog

Time to be conservative with your 401K

Most of the posts I and other financial bloggers write are typically focused on individual stocks or ETFs and managing active portfolios. For those folks who are more conservative investors, those whose main investment vehicle is a 401K, for example, the techniques for portfolio management might be a little different. The news of stock markets falling and pundits predicting recession is disconcerting to professional investors as well as to those of us who are watching our balances in an IRA or 401K sag. What approach should the average 401K investor take? Let's assume that the investor is contributing on a regular basis to one of these retirement accounts. There are two questions that the investor needs to ask: 1. Should I stop putting the regular contribution into stocks? My feeling is that investors making regular contributions are being handed a present by the markets. Every week the market goes down, these investors are lowering their average cost. When markets reco...

Unlock Stock Market Profits - Key #4

This is the fourth article in a series of posts describing 10 tools to help you identify and evaluate good investing ideas. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. ( Click here to read the original post ) With this fourth post, we will continue another step along the path of finding stocks that seem to have some potential. The first post in the series discussed how to use unusual activity to identify investing ideas. The second post described how to use stock screeners. The third post described how to use lists of new highs and new lows. This post will focus on identifying social or business trends in order to find investing ideas. Information on new trends might turn up anywhere. In conversation with friends or business associates, in newspapers or magazines, on TV or though your work. The key is to be aware of trends and how they start, stop or change. We'll start by describing what...

Trade Radar gets another update

Some of our data sources changed again and it impacted our ability to load fundamental/financial data. In response, we are rolling out a new version of the software: 7.1.24 The data sourcing issues are fixed and some dead links in the Chart menu were removed. So whether you are a registered user or someone engaged in the free trial, head over to our update page and download the latest version. The update page is here:   https://tradingstockalerts.com/software/downloadpatch Contact us if you have questions or identify any new issues.