as part of our
, I shared why the Fed is ultimately the one mashing the gas pedal
to drive stock prices higher. (Scary thought, huh?)
Well, the good news is that the fate of our hard-earned capital
in Ben Bernanke's hands.
Even if he eases up on the quantitative easing (QE) efforts,
underlying company fundamentals support higher prices still.
So Far, So Good
The end of last week marked the end of this year's professional
football season. (Pass the Kleenex, please.) But it also marked the
halfway point for the fourth-quarter earnings-reporting season,
which is a tad more important.
You'll recall, on January 10, I told you to keep an eye on three
key earnings metrics that can predict the trajectory of stock
prices in the weeks and months ahead.
So let's check in on the latest readings…
~Key Metric #1: Earnings "Beat Rate"
I told you that the earnings bar was set extremely low heading
into this reporting season. And that's proven to be true.
Case in point: 63.1% of companies beat earnings estimates so
far, according to Bespoke Investment Group. If the reporting season
ended today, that would be the best earnings "beat rate" in nine
Remember, I also predicted that "any reading above last
quarter's 60.1% should be enough to propel stock prices higher."
And sure enough, the S&P 500 Index is up 3.7% since
) officially kicked off the reporting season.
It's worth noting that Bespoke bases its calculations on a much
broader universe of U.S. stocks. But if we limit our analysis to
just the S&P 500 companies, we get a similar picture of
report reveals that of the 234 companies in the S&P 500 that
already reported results, 70% topped expectations. That's better
than the average beat rate over the last four quarters, which is
~Key Metric #2: Revenue "Beat Rate"
While earnings can be manipulated, sales cannot. This makes
revenue a more reliable indicator of demand. And based on current
sales data, demand is stronger than expected, too.
At the halfway mark, the revenue "beat rate" - the percentage of
companies topping sales expectations - stands at 62.2%, according
to Bespoke. That's a dramatic increase from last quarter's reading
Once again, FactSet's calculations confirm the strength. It
estimates that 67% of S&P 500 companies topped sales
expectations so far. And that's head and shoulders above the 50%
average of the last four quarters.
~Key Metric #3: Guidance Spread
While companies aren't required to provide future guidance,
enough do. So I've long contested that it's worthwhile to track
this statistic. I'm second-guessing that assertion now, though.
For the last five quarters, the guidance spread - the difference
between the percentage of companies raising guidance and those
lowering guidance - has been negative.
And although Bespoke hasn't updated its calculations recently,
FactSet's report reveals that we're most likely in store for
another negative reading this quarter.
So far, 50 companies in the S&P 500 have issued negative
guidance. Meanwhile, only 11 have issued positive guidance.
Add it all up, and I think corporate executives that provide
guidance are attempting to game the system. They're constantly
under-promising - just so they can over-deliver.
And there's definitely an incentive to do so.
Consider: Going into this quarter, expectations were extremely
low. Yet most companies beat expectations. The end result? Stock
prices are up an average of 0.77% on the day of their earnings
report, according to Bespoke. That's the best one-day average gain
in eight quarters.
In other words, the whole under-promise, over-deliver tactic
ultimately helps drive share prices higher. I'll take it for now.
But in future quarters, we might revisit the importance of the
guidance spread metric. Stay tuned.
Translating the Data into Strategy
Now, before someone quips that all these metrics are meaningless
unless we can use them to identify new opportunities, let me do
It stands to reason that "triple plays" - companies beating
earnings expectations, beating revenue expectations
raising guidance - are the most fundamentally solid - and,
therefore, the most investment worthy.
And if we focus on sectors with the highest beat rates, too, we
should be able to increase our odds of investment success even
more. After all, high beat rates indicate that the sector is
benefiting from some type of tailwind. Otherwise, companies would
be missing expectations, not beating them.
With all this in mind, we should be focusing on the technology
and healthcare sectors right now, as they sport the highest
earnings and revenue beat rates this quarter.
In terms of specific opportunities, here are two technology
triple plays to consider:
Super Micro Computer
And here are two healthcare triple plays to consider:
As always, I recommend that you perform your own due diligence
before investing in any of them. And "you're welcome" for narrowing
the universe of thousands of stocks to choose from, down to only a
Bottom line: There's not a soul on Earth predicting that Ben
Bernanke is going to slam on the brakes by ending QE efforts and
simultaneously raising interest rates. So we can reasonably expect
the bull market to continue, given the underlying momentum in
That being said, don't buy blindly. Instead, invest in sectors
and companies putting up the strongest results. Or, more simply,
remember that the trend is your friend