The current earnings season is quickly coming to an end, and
overall, the earnings reports have been positive, but there has
been concern over the number of companies that have issued worse
than expected forward guidance.
According to FactSet Research
, through February 21, out of the 442 companies in the S&P
500 that have already reported, 72% have reported better than
expected quarterly results, and 65% have reported better than
With the high number of companies besting analyst estimates
for their most recent quarter, it is easy to understand why the
market was able to move higher in February, but everything is not
as pretty as it appears on the surface.
As FactSet reports, looking ahead, 92 of these same companies
have issued earnings guidance, and 75 of these issued negative
forward guidance, with just 17 issuing positive EPS guidance.
This translates to an 82% of companies issuing negative
With the high percentage of companies issuing negative
guidance, perhaps the safest way to get involved in the market is
with growth stocks. These are companies that have a history of
solid earnings growth as well as expected growth in the future.
These companies tend to be more stable, and a great way to invest
during uncertain times, but of course there is no guarantee that
these companies are going to outperform the market.
Let's take a look at two different growth stocks to illustrate
One of the bigger growth stocks to report earnings over the
last week was Coca-Cola (
). The soft drink giant reported its fourth quarter results on
February 18, and Wall Street was not impressed.
Coke reported weaker than expected global sales growth, and a
decline in the U.S., where consumers continue to shift away from
sugary soft drinks. Quarterly revenue dipped 3.6%, and came in
below the consensus estimate. However, quarterly earnings of 46
cents per share were in-line with analyst estimates. Wall Street
took a bearish stance on the stock following its report, and the
stock dropped 3.8% on the day of the news.
Another big name growth stock to recently report quarterly
results is electric car manufacturer Tesla (
). The company reported its fourth quarter results on February
19, and easily bested analyst expectations for its recent
quarter. Quarterly earnings were $0.14 per share, $0.10 higher
than expected, and revenues of $761 million were well above the
$713.5 million analysts had forecast.
The better than expected results sent the stock soaring,
gaining 8.5% the day after the earnings were released.
Just like every segment of the stock market, there are going
to be some winners and some losers among growth stocks, but
overall, I believe they are a safe way to invest at the current
time. However, with the high level of negative EPS guidance we
have seen, I prefer to take a diversified, hedged approach to the
One way to invest in growth stocks is with the Vanguard Growth
). This exchange-traded fund is set up to track the performance
of the CRSP US Large Cap Growth Index, a benchmark that measures
the return of large cap growth stocks.
Year to date, VUG has gained 1.4%, which compares favorably to
the Dow Jones, which is down 2.5%, and the S&P 500, which is
down 0.3%, though it trails the NASDAQ, which is up 2.4%.
Among the top holdings of VUG are Apple (
), Google (
), Coca-Cola, Gilead Sciences (GILD) and Philip Morris (PM). As
you can see by the above list, its holdings are diversified, so
you are not exposed too much to any one sector of the market.
A nice hedged trade on VUG would be the June 83/88 bull put
credit spread. In this trade, you would sell the June 88 put
while buying the same number of June 83 puts for a credit of 35
cents. This trade has a target return of 7.5%, which is 22.9% on
an annualized basis (for comparison purposes only). With VUG
trading at $94.34, this trade has built in 6.3% downside