Weekly Preview: Earnings to Watch This Week (CSCO, HD, PANW, WMT)
Stocks ended Friday higher, giving a bit of relief following several days of selling pressure that sent the all three major benchmarks falling below their 200-day moving average earlier last week. During the selloff, which punished growth and tech stocks, the FAANGs took a significant pounding where Meta Platforms (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX), and Google parent Alphabet (GOOG , GOOGL) reached reached 52-week lows.
Even with the rebound the market saw on Friday, all three major averages booked another week of losses. The main issue pressuring the entire market has been fear of a recession stemming from a combination of rising interest rates and rising inflation. But is the correction nearing its end? The Dow Jones Industrial Average rose 466.36 points, or 1.5%, to end Friday’s session at 32,196.66. The S&P 500 gained 93.81 points, or 2.4%, to finish at 4,023.89.
The tech heavy Nasdaq Composite, which has been brutally punished, jumped 434.04 points, or 3.8%, to end at 11,805. On a percentage basis, this was the Nasdaq’s biggest daily gain in almost two years. For the week, the Nasdaq was the biggest decliner, losing almost 3%. The Dow gave up 2.1%, while the S&P 500 declined 2.4%, posting its sixth straight weekly loss. While stocks appear cheap, investors are unsure whether this is a buying opportunity or if there will be more downside ahead.
The main concern has to do with the direction of the economy; namely, can the Fed control inflation in a manner that doesn’t cause a recession? In the meantime, stocks have reached what many analysts call “oversold” levels. The question is, which stocks or sectors now offer the most upside, even if inflation concerns were to persist through next week or longer? Friday’s action suggests that the market is due for a short-term rebound on any good news. But investors would prefer to have that signal that a bottom has been reached.
While it would be premature to raise the “all clear” flag, there are tons of under-appreciated buying opportunities that can give portfolios an immediate boost, particularly in this oversold condition the market has reached. I mentioned the FAANGs earlier. Facebook, Apple and Amazon would be a good start. Their fundamentals are intact. And investors with a long-term view this recent pullback presents a buying opportunity.
On the earnings front, here are the names I’ll be watching this week.
Home Depot (HD) - Reports before the open, Tuesday, May 17
Wall Street expects Home Depot to earn $3.68 per share on revenue of $36.65 billion. This compares to the year-ago quarter when earnings were $3.86 per share on revenue of $37.5 billion.
What to watch: Home Depot stock has been hit hard thus far this year, falling over 30% year to date, trailing the 17% decline in the S&P 500 index. And it’s not a surprise as interest rate hiking cycles have historically hampered home improvement stocks. That said, there is still confidence in the housing market, which has held up relatively well, despite the rising mortgage rates. And although the company is facing tougher year-over-year comparisons, rising costs of construction materials and issues related to supply chains, Home Depot’s longer-term story remains intact. So now might be a good time for investors to build a foundation in Home Depot stock, which is trading at a discount relative to its historical valuation. From an execution perspective, the home improvement giant has established a strong track record for beating consensus estimates, surpassing both revenue and profit estimates in the last nine quarters. In the most recent quarter, the management shared its long term goal of achieving $200 billion in sales with improvement in in-store productivity and cost reduction. Nevertheless, 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 17
Wall Street expects Walmart to earn $1.48 per share on revenue of $138.03 billion. This compares to the year-ago quarter when earnings came to $1.69 per share on revenue of $137.16 billion.
What to watch: The retail sector has been under pressure over the past few weeks as investors have digested the Federal Reserve's decision to raise interest rates. Although rate hikes were not a surprise, investors are nonetheless weighing the potential impact on consumer spending, and perhaps worse, a recession. With interest rates on the rise, combined with rising inflation, the fear is that consumers will spend less. And that’s likely to impact retailers such as Walmart, which has outperformed the market year to date with its stock rising 2%, compared to 17% decline for the S&P 500 index. Why has Walmart stock done do well? Some investors are betting that higher inflation could drive more revenue to Walmart. Likewise, higher oil prices could also boost the company’s e-commerce sales as more consumers shop online. The company’s hybrid model of brick-and-mortar retail and e-commerce has given Walmart an advantage over its rivals. And the current environment enables Walmart’s e-commerce growth to accelerate in the future. The company on Tuesday will need to talk positively about these growth prospects and the macro impact on its customers.
Cisco (CSCO) - Reports after the close, Wednesday, May 18
Wall Street expects Cisco to earn 86 cents per share on revenue of $13.34 billion. This compares to the year-ago quarter when earnings came to 83 cents per share on revenue of $12.8 billion.
What to watch: Cisco might produce network equipment that customers can rely on, but investors aren’t so sure that reliance is worth the current stock price. The network equipment maker has seen its stock declined 23% so far this year, including a drop 15% drop and 7% in the respective six months and thirty days. That said, Cisco’s stock performance does not accurately reflect the qualities of the company and its leadership. Aside from generating significant free cash flow, Cisco offers an attractive yield. Thanks to its enduring business model, the company has more than $20 billion in excess cash on its balance sheet, reflecting about 10% of its current market cap. This amount of cash gives Cisco the option to return it to shareholder in the form of dividends and share buybacks — something it has done consistently over the past five years, including buying back some almost $50 billion since 2017. But for any of that to matter, the company on Wednesday must show consistent growth in its pivot towards software and subscription businesses as it scales down the legacy hardware segments.
Palo Alto Networks (PANW) - Reports after the close, Thursday, May 19
Wall Street expects Palo Alto to earn $1.68 per share on revenue of $1.36 billion. This compares to the year-ago quarter when earnings came to $1.38 per share on revenue of $1.07 billion.
What to watch: The cybersecurity specialist Palo Alto Networks have consistently outperformed the overall cybersecurity industry when it comes to growing revenues and profits. Offering a diversified suite of IT products, the company continues to benefit from its leadership position in seven key cybersecurity categories, and thus is expected deliver growth on both the top and bottom lines when it reports results for the quarter that ended April. But that hasn’t prevented Palo Alto stock from the sort of punishment software stocks have endured so far this year. Despite its operating success, including eight straight quarters of top- and bottom-line beats, Palo Alto stock has fallen 14% year to date, including a 21% drop just in the past thirty days. Investors who have waited for a better entry point can do well here, given that cybersecurity will remain one of the hottest sectors in tech in the next five years, during which the company is projected to see an earnings growth rate of 27.5% annually. The question on Thursday, however, will be whether the company can get investors (and analysts) excited about its stock in the current market.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.