This morning, two major nationwide retailers reported first quarter earnings. Both showed a big beat of analysts’ expectations on earnings and revenue. Both also showed good growth and forecast for more of the same. And yet, in pre-market trading, one stock is around three percent higher than yesterday’s close, while the other is three percent lower. Why is that, and what does it tell us about interpreting earnings in a general sense?
The two stocks are Target (TGT), which is trading higher, and Lowe’s (LOW), which has lost ground. Target reported EPS of $3.69 versus expectations for $2.25 on revenue of $24.2 billion versus an expected $21.81, while Lowe’s Q1 numbers showed EPS of $3.21 versus $2.62 on $24.42 billion, as compared to the consensus estimate of $23.86 billion. Obviously, Target’s beat was bigger all around but, even so, the big discrepancy in the stocks’ reactions to good numbers makes little sense on the surface.
There are, however, several logical reasons for this.
First is that market expectations often differ from analysts’ estimates and, in the short-term at least, are more influential on a stock’s reaction. That was definitely the case with Lowe’s, because Home Depot's (HD) great Q1 earnings yesterday led to a “whisper number” for Lowe's, which was much higher than the published estimate. The earnings and revenue may have beaten the “official” expectation handily, but still fell short of some of the more optimistic speculation over the last 24 hours.
Even that, though, probably wouldn’t have resulted in such a big negative reaction were it not for the fact that the overall market mood this morning is negative. Inflation and resulting rate hikes are being talked about again in front of the release of the Fed Minutes later today, the dollar index (DXY) is trading below the psychologically important 90 level, and the 10-Year yield is holding above 1.6% and climbed a couple of basis points in early trading. All of that, along with proximity to the high and even a big selloff in crypto overnight, has traders jittery and looking for reasons to sell. In that context, even good numbers that miss exaggerated expectations are reason enough.
That brings us to why Target, with slightly better but essentially similar results, jumped on their release. The difference between the two has more to do with where each company sits in relation to the distortion of retail wrought by the pandemic. The conventional wisdom is that Lowe’s benefited from the lockdown and the stay-at-home trend that followed, while Target will do better as things open up and people go back to their stores and shop in anticipation of regaining a social life. The actual forward guidance was positive from both companies, but circumstances make that positivity more believable from Target than from Lowe’s right now.
As for useful takeaways for traders and investors from these two vastly different reactions, the most powerful is that no data should ever be looked at in a vacuum. We think of numbers as entirely objective but should never forget how the reaction to these objective asset prices is entirely subjective. More succinctly: Mood matters.
For traders specifically, the lesson here is to avoid the temptation to try and react quickly to data or news releases. No matter how fast your fingers are, you won’t beat the algos and HFTs to the punch, so there is no chance of you squeezing out the maximum return from a news or data release. There is, however, an extremely good chance that you will get caught should the market reaction be not what you expected. In other words, an immediate reaction to news puts you in a position where potential profits are small and potential losses large, and you shouldn’t need me to tell you that that isn’t a recipe for long-term trading success.
Usually, from a longer-term perspective, I would look at a stock like LOW, which dropped on good news as an opportunity to buy stock in a successful company at a discount, but in this case, I am more inclined to go with the market.
The timing case against Lowe’s is a strong one and they could well have pulled a lot of business forward. When you add in high lumber costs and a labor shortage that is curtailing growth in construction, and roughly 200% gains in the stock since March of 2020, a retracement in the stock looks justified, even if a great Q1 earnings report is a strange catalyst for that move. Target, on the other hand, has its brightest days ahead of it and, after experiencing good growth both in-store and online, with its own brands doing especially well, looks set to continue the gains as the remarkable recovery in retail continues.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.