5 Reasons to Worry About Next Week

The economy is showing signs of fumbling the recovery.

For starters, mortgage rates are starting to creep higher. The 30-year rate is closing in on 4%, making it the highest level in a year. As cheap financing dries up, where do you think housing prices and the purchase of other big-ticket items will go?

The news isn't just iffy on the macro level. There are also more than a few companies that aren't pulling their own weight in this supposed economic recovery.

There are still plenty of names that aren't growing their earnings. Let's go over a few of the companies that are expected to go the wrong way on the bottom line next week.

Company

Latest Quarter EPS (estimated)

Year-Ago Quarter EPS

lululemon athletica (NASDAQ: LULU  )

$0.30

$0.32

Oxford Industries (NYSE: OXM  )

$0.78

$1.12

Synutra (NASDAQ: SYUT  )

$0.02

$0.13

Smithfield Foods (UNKNOWN: SFD.DL2  )

$0.43

$0.43

KMG Chemicals (NYSE: KMG  )

$0.22

$0.33

Source: Thomson Reuters.

Clearing the table
Let's start at the top with Lululemon. This may be a surprise. Isn't this the upscale yoga apparel retailer that's been posting monster growth in recent years? Yes, that's all true, but we can't forget the Luon pants fiasco that erupted in mid-March. The chain had to pull stock of its black Luon pants because the sheerness made them practically see-through. It was an embarrassing episode that took place midway through the company's fiscal quarter.

The chain only recently began restocking all but one of the styles that were pulled, and early on the retailer warned that it would sting the bottom line. Analysts see healthy revenue growth of 19%, but they see profitability dipping slightly.

Oxford Industries is also in the apparel business, but it didn't have any see-through scandals to work through. Oxford is the company behind Tommy Bahama tropical shirts, Lilly Pulitzer dresses, and other branded clothing items.

Analysts see a small uptick in revenue at Oxford, but they also see profitability dropping sharply. If the pros seem pessimistic in holding out for just $0.78 a share on Tuesday, keep in mind that these same analysts overestimated Oxford's profitability in the two previous quarters.

Synutra is a leading seller of infant formula in China. Naturally, this would seem to be a big business given China's place as the world's most populous nation. However, Wall Street sees revenue falling 7% for the quarter.

It gets worse. If you think that Oxford is on a mean streak after coming up short relative to expectations in the two previous quarters, Synutra missed analyst profit targets every single quarter last year.

You won't find too many people tuning in to hear Smithfield's financials later in the week. The producer of pork and other meat products agreed to a $4.7 billion buyout by Shuanghui International Holdings last week. A bad report is unlikely to sway Shuanghui. There's a reason Smithfield made itself available, after all, and it's a safe bet that both companies know what's coming in next Friday's report. Analysts see quarterly income coming in flat with last year's showing.

Finally, we have KMG Chemical. The producer of electronic- and wood-treating chemicals is expected to see profitability dip by a third next week.

KMG is doing something about that. Earlier this week it completed its $63.3 million purchase of OM Group's Ultra Pure Chemicals subsidiary. When organic growth isn't enough, acquisitions can often help. Despite the uninspiring projected bottom-line showing, shares of KMG hit a fresh high just last week.

Why the long face, short-seller?
These companies have seen better days. The market has rewarded many of these stocks with reasonable gains over the past year, but they still haven't earned those upticks. Lower earnings translates into higher earnings multiples, and nobody wants to see that happen.

The good news here is that Wall Street already expects these companies to deliver shrinking bottom lines. In other words, the bad news is already baked into the shares.

The more I think about it, the less worried I become.

3 reasons to get excited about next week and beyond
With the American markets reaching new highs, investors and pundits alike are skeptical about future growth. They shouldn't be. Many global regions are still stuck in neutral, and their resurgence could result in windfall profits for select companies. A recent Motley Fool report, "3 Strong Buys for a Global Economic Recovery" outlines three companies that could take off when the global economy gains steam. Click here to read the full report!


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  • Report this Comment On June 08, 2013, at 2:38 AM, seattle1115 wrote:

    "As cheap financing dries up, where do you think housing prices and the purchase of other big-ticket items will go?"

    Long term, it will make little difference. People need to live somewhere, and they need to get around. They will buy homes and cars because they perceive that they need homes and cars. They may regret that they didn't make the purchase earlier when rates were cheaper, But they will make the purchases anyway. You will notice that people continued to buy cars and homes in 1980, when interest rates were sky-high.

    Short term, rising interest rates are likely to drive increases in purchases. People are likely to see that these unsustainable (and probably even unhealthy) low interest rates are moving toward a more historically reasonable level, and will want to make their purchases as soon as possible. If 30 year fixed mortgage rates start to creep above 4%, look for the market to go hog wild.

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