Weekly Preview: Earnings to Watch This (BIDU, CSCO, HD, WMT)
Stocks ended Friday higher, getting a bit of relief following several days of selling pressure that sent the S&P 500 index to fall below its 50-day moving average earlier this week.
During the selloff, which punished growth and tech stocks, he FAANGs took a significant pounding where Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX), and Google parent Alphabet (GOOG , GOOGL) ended the week down by at least 3%. And this is even with the rebound the market saw on Thursday and Friday. The main issue that is pressuring growth and tech stocks, and for that matter the entire market, has been fear of rising inflation. On Wednesday data showed that the U.S. consumer-price index, or CPI, rose 4.2% year over year in April which is higher than expected.
For the week, the Dow ended 1.1% lower, while the S&P 500 index gave up 1.5%. The tech-heavy Nasdaq fell the hardest, losing 2.3% for the week. After all three averages closed at record highs earlier in the month, it’s been tough to watch the markets seemingly go straight down for several consecutive days. An argument can be made that stocks had also reached overbought territories prior to the recent pullback. And it’s also likely that the market had priced in tons of good news related to post-pandemic recovery and earnings that didn’t materialize.
So, is fear of rising inflation really the cause of the recent pullback or has the market justifiably corrected as it has done in previous cycles? Let’s assume it’s for former. Here again, hotter inflation is nothing new and the stock market has often rebounded from inflation fears just as swiftly as it has fallen. To be sure, I’m not suggesting the volatility which lead to the Dow Jones Industrial Average on Wednesday posting its worst day since January is going away. The question is, which value stocks now offer the most upside, even if inflation concerns were to persist next week or longer?
There are tons of under-appreciated buying opportunities that can give portfolios an immediate boost, particularly in this oversold condition the market has reached. The FAANGs, namely Facebook, Apple and Amazon would be a good place to start nibbling. Their fundamentals are intact. And investors with a long-term view this recent pullback presents a buying opportunity. Likewise, amid the reduced pandemic-related restrictions being adopted in many states, the rotation into value stocks such as restaurants, airlines, hospitality seems like good bets on the economy re-opening much sooner.
As far as earnings go, here are some names I’ll be watching this week.
Home Depot (HD) - Reports before the open, Tuesday, May 18
Wall Street expects Home Depot to earn $3.03 per share on revenue of $34.61 billion. This compares to the year-ago quarter when earnings were $2.08 per share on revenue of $27.54 billion.
What to watch: Can the housing market remain resilient? Home Depot has benefited from a consistent rise in new home construction and home-related remodeling projects, and its stock has responded favorably, soaring 22% year to date, more than doubling the 9% rise int he S&P 500 index. The shares have enjoyed a strong run over the past six months, rising more than 17% compared to 14% rise in the S&P 500 index. All told, the home improvement giant has established a strong track record for beating consensus estimates, while profits have topped Street forecast in every quarter over the past five years. The pandemic environment has created an opportunity for Home Depot to take market share over the next two to three years, according to various Wall Street analysts. The company’s guidance on Tuesday will provide a hint of how realistic that forecast might be.
Walmart (WMT) - Reports before the open, Tuesday, May 18
Wall Street expects Walmart to earn $1.21 per share on revenue of $132.09 billion. This compares to the year-ago quarter when earnings came to $1.18 per share on revenue of $132.79 billion.
What to watch: Expectations are high heading into Walmart’s earnings report as many analysts project the retail giant to have secured more market share gains not only for its physical stores, but also from its expanded e-commerce capabilities. Walmart has taken a page out of Amazon’s (AMZN) playbook by growing revenue, while sacrificing profits to enhance the customer experience. The stock market has applauded the company’s approach, given that digital revenue have shown tremendous growth, averaging 35% annualized gains over the past five quarters. Whether from its record top-line beats to strong same-store sales, to consistent execution across all product categories to margin expansion, Walmart’s recent results have been nothing short of impressive. But the company is now facing much tougher comps. Can it continue to deliver on Tuesday?
Baidu (BIDU) - Reports after the close, Tuesday, May 18
Wall Street expects Baidu to earn $1.66 per share on revenue of $4.22 billion. This compares to the year-ago quarter when earnings came to $1.26 per share on revenue of $3.22 billion.
What to watch: Baidu shares have been under pressure, falling more than 40% over the past few weeks during the recent tech selloff. The company also suffered when a hedge fund with a large position was forced to unload shares due to a margin call. Investors who have been on the sidelines should see this as a solid buying opportunity. Often referred to as the “Google of China,” the Chinese tech giant has promised to boost its investments by some 30% annually over the next several years. Among its many initiatives include a stand-alone artificial intelligence (AI) semiconductor capabilities, as well as streaming and autonomous vehicles. With more than 13 years in research and developing its vehicle technology, Baidu has established itself as one of China’s leading players in autonomous driving. But what will the vehicle market look like in the coming years? And can Baidu generate enough revenue to compete with other established leaders? This, among others, will be an important topic analysts will ask about during Tuesday’s conference call.
Cisco (CSCO) - Reports after the close, Wednesday, May 19
Wall Street expects Cisco to earn 82 cents per share on revenue of $12.56 billion. This compares to the year-ago quarter when earnings came to 79 cents per share on revenue of $11.98 billion.
What to watch: The coronavirus pandemic has had a significant adverse impact on Cisco’s business which has forced enterprise and commercial customers to either delay orders or suspend projects entirely. While Cisco has benefited from the shift of work-from-home with its Webex collaboration platform, the revenue generated in that business have not been enough to offset the declines in its breadwinner segments such as routing and switching. But the networking giant is once again on the right track, shifting its business model more towards software and applications, particularly those services that generate high recurring revenues. What’s more, due to its diligent cost controls, the company has amassed tons of financial firepower for acquisitions or organic expansion. With the share priced traded at such cheap valuation, now would be the time to take a long look at Cisco. But for that to matter the company on Wednesday will want some assurances that Cisco can pivot quickly to new growth businesses to offset the revenue declines in the legacy segments.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.