We're less than a week from the unofficial kickoff of earnings
season, and I couldn't be more excited. When a company reports
earnings, investors get a fresh wave of data about the health of
their companies. Unlike the hype we all hear from disreputable
sources or the slanted news coverage you get from various media
outlets, these earnings numbers don't lie.
In preparation for earnings season, I'm going to cover some of
the biggest factors that impacted companies in the last quarter, so
you can know which sorts of companies are going to catch a tailwind
and which will be trying to meet their goals without the extra
Let's go ahead and cover everything you need to know about
second-quarter earnings season.
Earnings Season Trend #1: The U.S. Dollar
Since the recession began and the value of the U.S. dollar
started an underlying downward trend, I have received numerous
comments and questions wondering how investors would survive the
devaluing. If you're one of those people concerned over the recent
decline in the dollar, my advice is simple: Invest in companies
with strong international business ties.
If you're a U.S. business that sells goods and services at home
and abroad, you're going to get paid in foreign currencies. When
the value of the dollar is declining and you're converting those
foreign funds to U.S. dollars, you're going to get a boost to your
bottom line. That's because you get a lot more dollars in the
currency conversion than you used to when the value of the dollar
This is what is happening to companies right now, and this
earnings season you're going to see companies with strong overseas
sales get a currency tailwind that will translate to higher
earnings. This leads to analyst upgrades and bigger earnings
surprises, which get stock prices moving higher.
Betting on the declining dollar may not sound like an obvious
choice, but it's a choice that works - especially during earnings
season. I'll give you an example: In my
Blue Chip Growth service
approximately 60% of the companies I recommend to subscribers are
paid in foreign currencies. During first-quarter earnings, my
Blue Chip Growth
stocks posted an average earnings surprise of 8%, tearing apart
analysts' estimates. A big part of their success was due to the
boost in earnings received from currency conversion.
The role of the U.S. dollar in earnings should not be
underestimated. If you're looking to buy companies that will do
well this earnings season, check their recent quarterly and annual
reports to see what percentage of their sales are based abroad. Any
significant sales in countries with appreciating currencies against
the dollar are going to get an extra boost this earnings
Earnings Season Trend #2: Stock Buybacks
Since many companies can borrow money at 3% or less, an
increasing number of smart CFOs are deciding to buy back their
respective stock. This is a smart move in any market, but even
smarter in the current market, given the recent drops it has
experienced. Investors aren't big fans of volatility and are now
looking for safe bets. And one of the first things they look for
when choosing a safe stock to invest in is a low P/E ratio.
The P/E ratio is calculated by taking the current stock price
and dividing it by the last reported annual earnings per share.
When a company buys back shares, there are fewer shares available
on the open market, and that lowers the P/E ratio and makes it an
When a company can afford to initiate buyback programs, it is an
excellent sign of health. Fewer shares on the market not only lower
the P/E ratio but also drive the market value higher. So stock
buybacks are great treats for investors.
Many companies attract more attention just before or just after
earnings seasons by announcing buybacks. Check your holdings for
recent buybacks and get ready for some added buying pressure this
earnings season and beyond.
Earnings Season Trend #3: Energy, Technology, Retail and Cyclicals
Last quarter, all 10 sectors of the S&P posted earnings
surprises. This quarter analysts have cut expectations for six out
of the 10 sectors. Only four sectors have not been cut, and those
four are energy, technology, retail and the big cyclical
We're still seeing the effects of high oil prices at the pump,
and decisions to tap into oil reserves have further added to the
attraction of oil-related stocks. Also in the energy sector, the
solar industry has received big boosts over the last quarter.
Announcements from countries like Japan, China and Germany vowing
to reduce their uses of nuclear energy sources over the next
several years in favor of alternate energy sources like solar
energy, brought a whole new pool of investors into the field.
As for the technology sector, it's difficult not to have high
expectations when companies are constantly revealing new
technologies or innovative products. No doubt gadgets like
) latest iPad and recent advances in cloud-computing will be the
focus of many upcoming earnings reports.
I have to say that I've been impressed with the resilience of
retail stocks on the whole. It's no secret that consumers have
become increasingly frugal in response to higher costs, weak
employment numbers and other concerns. Though retail sales have
begun to wane, the declines have proven far less than expected, and
analysts are still calling for 51% growth in the sector for the
And then there are the cyclical stocks. These stocks are defined
by their connection to the health of the overall economy and normal
business cycles. Many of these stocks were hit on expectations of
lower GDP growth. With GDP expected to pick up in the second half
of the year, we'll likely see these companies announce strong
forward guidance and buyers rush in.
Just because a company is in one of these sectors doesn't make
it an automatic buy, but if you're looking for new buys this
earnings season, this is where I would start your search.