In the wee small hours of this morning, UPS (UPS) announced fourth quarter earnings. As it turned out, they didn’t need to hide the announcement away in the pre-dawn hours because the results were an unmitigated success. They beat on just about every metric and the stock jumped around eight percent in response. That is obviously great news for UPS and their stockholders, but the results can also be interpreted in multiple ways as a good sign for the market as a whole.
First, we live in a world where what is good for package delivery companies is good for business overall. More deliveries mean more retail purchases, which means more demand. There was a time when that consumer retail demand was measured in terms of footfall or head count at malls but now, it hardly matters how many people go to a mall. What matters is how much people order online, so a surge in deliveries and revenue for UPS points to health in the underlying economy that has a positive impact on everything, from manufacturing to software and hardware sales to retail itself.
That is a fairly obvious way in which good news for UPS is good news for the market in general, but there is another, more technical reason that investors should be pleased with both the news and the market reaction to it: It shows that the recent selloff is overdone.
Throughout January, UPS followed the market downward, dropping around twelve percent from a January 7 high of 219.45 to the January 28 low of 192.74. That fit with the mood over those three weeks, but it ignored something basic. It took UPS down to a level below where it was before the company announced their Q3 results three months ago. They beat expectations on the top and bottom lines then but, more importantly in some ways, they also upped their full year 2021 guidance.
In other words, UPS told the market three months ago that they expected to have a great Q4 off of a strong Q3 base and yet the stock dropped over ten percent. The reason for that drop? An overall fear of what may come, not anything particularly solid. There was fear three months ago too, don’t forget. In the first few weeks of that earnings season, the S&P 500 performed poorly, and a lot of companies recorded great results but talked direly of problems to come.
As I have said before, investors should usually take these sorts of warnings with a pinch of salt. Sometimes they are based on real problems specific to an industry or company, and can be really bad news. For example, if an oil company said they were seeing signs of falling demand and were closing wells, the negative impact on earnings and revenue would be real.
When companies are less specific about future fears, however, and talk about more theoretical things like the risks of inflation, or the fact that there might be another Covid variant in our future, or something else that could have a negative impact, is usually more a product of an excess of caution than something more concrete. That's not to say any concerns they raise aren't valid; it's just that there's a simple strategic reason for emphasizing them: There is no downside to a CEO pointing out potential problems after a good quarter, but lots of upside.
The good quarter that a company just had will minimize the negative impact on the stock when a CEO talks pessimistically about the future, while doing so sets them up for success. It enables CEOs to effectively say in three months’ time, “Look how well I have managed that tricky situation. I think I deserve another $10 mil or so, don’t you?” On the other hand, if those issues do materialize, even ones not foreseen or spoken of, the next quarter’s disappointing earnings are accompanied by a big dose of “I told you things were going to be bad. Aren’t I smart? Maybe I should get a raise…”
Okay, maybe that’s a bit cynical, but you get my point. Positive earnings, even when accompanied by some cautious outlook, are a positive in the long run, while warnings, unless specific, are self-serving but not necessarily informative. A stock like UPS having gotten so caught up in the general negativity to the point where it fell below the level at which it beat estimates three months ago only makes sense if there is something happening that is actually hurting their revenue or earnings. After the Q4 numbers we saw this morning, that clearly isn’t the case right now. Yes, we know for sure now that the Fed will be tightening this year, but did anybody think otherwise three months ago?
We are all a bit wiser now than we were before UPS released earnings this morning. We now know that UPS had a good holiday season, which means that consumer consumption, the engine that drives the economy, is strong. That, in turn, means that the fears about last quarter were unjustified, raising the question of whether the market should have fallen ten percent.
Do you want more articles and analysis like this? If you are familiar with Martin’s work, you will know that he brings a unique perspective to markets and actionable ideas based on that perspective. In addition to writing here, Martin also writes a free newsletter with in-depth analysis and trade ideas focused on just one, long-time underperforming sector that is bouncing fast. To find out more and sign up for the free newsletter, just click here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
Read Martin's Bio