It's been a tough week for stocks as investors adjust to the
reality that the Federal Reserve won't be providing any more
liquidity to the U.S.
economy
. Get ready for more tough weeks ahead, too --
earnings season
is about to get underway and companies look poised to deliver
earnings
that range from so-so to disappointing. That's because Europe
remains in a weak condition, and Asia isn't looking much better,
either.
As an example, technology firm
Polycom (Nasdaq: PLCM)
just slashed its first-quarter guidance, noting that sales in Asia
will grow less than 10% from a year ago, well below recent 15% to
25% year-over-year growth rates. In the United States, Polycom now
expects sales to rise just 1% to 3% from a year ago. That shortfall
led to a quick 20% beat-down in the stock.
I hold a similarly cautious view. As I'll note in a moment, there
will be a few quarterly shortfalls in my
$100,00 Real-Money Portfolio
as well, though that won't lead me to make any moves, as these
stocks already trade at deep-value levels. The key takeaway: these
stocks could see renewed near-term selling pressure, but still look
poised to post solid gains for the next 1-2 years.
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Here's a quick preview of two key portfolio holdings. (I will help
set expectations for other holdings in the portfolio as earnings
season progresses.)
Alcoa (
AA
)
This aluminum producer looks set to kick off earnings season next
Tuesday, April 10, on a sour note. Analysts expect the company to
lose a nickel a share, before turning a $0.12 a share
profit
in the current quarter. Both of those views now look too
optimistic. That's because aluminum prices have fallen nearly every
day for two straight weeks. As of Thursday, April 4, aluminum sold
for $0.93 per pound on the
spot market
, which is a 10% drop in the past month.
I'm concerned that the consensus forecast for the first quarter
doesn't fully account for weak industry conditions in March. And I
simply can't see how Alcoa can earn the $0.12 a share that analyst
expect in the current quarter.
In hindsight, I am glad
I locked in some small gains
in mid-March when I sold half of my position in Alcoa.
And here's the strange thing... If Alcoa's results are as bad as I
fear, then I'd likely buy more stock. That's because the stock will
no longer be vulnerable to unrealistic future expectations, and
more importantly, could create a better backdrop for the company.
Recall that Alcoa is the lowest-cost producer in the industry.
Aluminum at $0.93 per pound causes Alcoa to report aGAAP loss, but
still generate a modestly positive operatingcash flow . But at that
price, many of Alcoa's rivals are flat out losing money. Low
aluminum prices will lead some of these firms to follow Alcoa's
lead by shutting capacity. This should cause prices to firm later
this year, and perhaps much better pricing in 2013 as the global
economy picks up steam. That's why I remain a long-termbull on
Alcoa.
Ford (
F
)
Domestic auto sales have been trending better than most expected
just three months ago, which should have enabled Ford to meet or
exceed first-quarter consensus estimates. But the automaker may in
fact trail profit forecasts, earning up to a nickel less than the
$0.38earnings per share (
EPS
) consensus. I take that view after parsing through Ford
management's comments regarding current business trends at this
week's New York Auto Show .
The key negatives:
• Ford's Latin American division likely lost even more money in the
first quarter than it did in the fourth quarter of 2011. That
region has seen slowing growth, especially in Brazil, so dealers
were stuck with high inventories that need to be drawn down.
• Europe has not gotten any better, and management guides for a
similar sequential loss as was seen in the fourth quarter.
(Notably, management thinks European results will markedly improve
later this year on the heels of a product cycle refresh.)
• Ford underestimated the strength of the U.S.
market
and didn't build enough of the most popular vehicles. The good news
is that scarcity brings firm pricing, and Ford points to
better-than-expected profit
margin
trends in North America. Ford will be sharply boosting production
this summer to regain any lost
market share
.
Still, this is a company on a clear upward long-term trajectory.
It's crucial that you not lose sight of the fact that Ford now has
the best management team in the business, an extremely competitive
line-up of cars and trucks, a
balance sheet
that has never been this strong, and major
operating leverage
to meet the rising auto sales expected in the next few years.
Despite the first-quarter shortfall, the outlook for the rest of
2012 is strong enough that full-year
EPS
consensus forecasts of around $1.50 a share -- an 8% gain -- still
look quite attainable. And if Europe and Latin America stabilize in
2013, then Ford could easily earn $2 a share or more -- compared to
the current $1.70 a share consensus. Simply put, you need to sit
tight on a stock that has that kind of
earnings potential
yet trades for just $12.50 (a forward P/E of about 6).
Risks to Consider:
Spain and Italy are showing troubling signs in recent days as
bond
yields move up, so the "stabilizing Europe" thesis for 2013 may not
come to pass, hurting both Alcoa and Ford along with many other
U.S. multinationals.
Action to Take -->
You shouldn't be too concerned about deep value stocks like Alcoa
and Ford as we head into a tricky earnings season, but you do need
to assess the wisdom of some of your more richly-valued
holdings.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of F, AA in one or more if its "real money" portfolios.