Dow Earnings Season: How Outlier Stocks Can Distort Entire Industries

Don't draw the wrong conclusions from first-quarter earnings season.

May 22, 2014 at 4:30PM

The Dow Jones Industrials (DJINDICES:^DJI) picked up further ground on Thursday, climbing 10 points as the stock market built on Wednesday's more impressive gain. For the most part, the first-quarter earnings season is over, and although a few stragglers have yet to issue their reports, investors are now looking back and drawing conclusions about the strong and weak industries in the broader market. Yet as Dow components Chevron (NYSE:CVX) and JPMorgan Chase (NYSE:JPM) show, it's easy to draw the wrong conclusion if you're not careful about considering how individual stocks can impact the results of entire sectors of the market.


Did financials and energy do as badly as it seems?
FactSet Research
issued its retrospective on first-quarter earnings season last week, evaluating how various sectors of the market performed. The research firm concluded that with 93% of S&P 500 companies having reported as of the date of the report, financials were the worst-performing sector in the market in terms of overall earnings declines, while energy stocks were the second-worst performers. Overall, financials saw earnings drop by 3.6% from the year-ago quarter, while energy fell 2.8%. That was markedly worse than the 2.1% earnings growth rate that the market as a whole enjoyed for the first quarter.

But if you just take those numbers at face value, you'll miss important nuances that could lead to a much different conclusion. For instance, FactSet noted that in the energy sector, Chevron had the biggest downward pull on earnings growth, with its earnings per share dropping more than 25%. By contrast, the majority of the subcategories within the energy sector actually posted earnings growth, especially given favorable conditions among smaller independent oil and gas producers. Meanwhile, Chevron has had to work hard just keep production levels from falling too much. Take out Chevron's outlier result, and FactSet found that energy-sector growth would have jumped 3.1% -- well above the market average.


Similarly, banks performed far worse than other subindustries within the financial sector. JPMorgan Chase and Bank of America (NYSE:BAC) were responsible for the lion's share of the earnings declines. Bank of America reversed its year-ago gain with a small loss for the quarter, while JPMorgan Chase saw earnings fall by almost 20%. Again, if you take those two stocks out of the mix, the financial sector would have grown by more than 5%.

When looking at Dow Jones components and other major companies, you have to be mindful of the impact they can have on the industries they represent. All too often, if you look at sector-wide numbers without considering the impact that Dow stocks and other megacaps have on the overall results, you'll make mistakes that lead you to erroneous conclusions about the health of the economy.

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Dan Caplinger owns warrants on Bank of America and JPMorgan Chase. The Motley Fool recommends Bank of America and Chevron. The Motley Fool owns shares of Bank of America and JPMorgan Chase. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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