Roundtable: Can You Believe These Earnings?

"I would much rather own equities at 9,000 on the Dow than have a long investment in government bonds or a continuously rolling investment in short-term money."
-- Warren Buffett earlier today on CNBC

The rally that started in March got a big boost in July as second quarter earnings reports have delighted investors.  As you've probably heard, the Dow is above 9,000 and the S&P 500 is flirting with 1,000. Yet, Buffett's still long-term bullish. Let's see what Fools think about the recent earnings-fueled celebration: 

What's the one thing that has surprised you the most since earnings season kicked into gear two weeks ago?

Dan Caplinger: I'm amazed at how investors continue to bid up shares even as profits continue to lag year-ago levels. AT&T and eBay (Nasdaq: EBAY  ) both jumped yesterday by beating analyst estimates, but both posted numbers well short of last year's earnings. After such a big rally already, you'd think investors would want evidence of real current growth before pushing shares up further.

Rick Munarriz: I'm refreshingly stunned to see companies deliver on their promises to scale back costs. The layoffs weren't just lip service. It hit home with this week's report out of Starbucks. The baron of baristas posted year-over-year earnings growth despite another quarter of negative comps. 

This isn't condescension. This is respect. Trimming away corporate overhead seemed like the trendy thing to do earlier this year. If it's helping companies more than get by now, can you imagine how great earnings will start to look once the economy is firing on all cylinders? 

These past two weeks have been eye openers ... in good ways.

Anders Bylund: The force of Mr. Market's reaction to getting some good news at long last. If you bought equal portions of Diamonds, Qubes, and Spydrs on July 10, right before earnings season kicked off, you'd have an impressive streak of "up" days and an 11.7% return today. Sure, I'm used to wild market reactions to even tiny news -- but a sustained rally like this comes straight out of left field.

Matt Koppenheffer: Since overall I'm relatively bullish on the market, I hate to say it, but it's been the lousy reports from the banking sector that surprised me the most so far. I know, I know, Goldman Sachs (NYSE: GS  ) blew the doors off the market and Bank of America (NYSE: BAC  ) and Citigroup (NYSE: C  ) each rang up a profitable bottom line. Dig deeper though, and you'll find that the profits at Citi and B of A were illusory at best. Goldman's profits may have been real, but considering where a lot of those profits came from, I'm concerned that nobody's learned anything from the financial meltdown.

Don't get me wrong, I think the banking sector is definitely moving in the right direction, but I think they've still got significant work ahead -- particularly in the core banking business -- before they'll get a pat on the back from me.

Alyce Lomax: Like Anders and Dan, I'm surprised by the euphoria. Many companies have been reporting "better than expected" quarterly profits, but for many, sales are down. That's not surprising given the economic climate and lackluster consumer confidence, but unbridled optimism seems shockingly simple-minded. I have a feeling that some companies' zeal to bolster profits in the face of all the fear means they will cut some of their best talent and perhaps alienate customers if they cut too close to the bone, and that's no good for the long term. Count to 10.

Meanwhile, even though a lot of companies have been getting second chances with their huge debt (look at CIT Group or New York Times as examples), they're relying on temporary life preservers, and challenges still loom. I've watched shares of many very beleaguered companies soar as the market rallies; many investors still seem to have a speculative, short-term view, instead of looking for stocks of quality companies that can weather the tough times.

Tim Beyers: Yesterday, I wrote on Twitter that Microsoft's (Nasdaq: MSFT  ) fourth-quarter revenue shortfall -- $1.3 billion less than Wall Street expected -- wasn't too surprising. Mr. Softy missed by $500 million in Q3.

Still, a billion-dollar miss was bound to raise some eyebrows, and I'll admit to going cockeyed after looking at the numbers. Most surprising was that Windows operating system revenue dropped year over year for the first time in company history. Good thing Windows 7 is code complete and due to ship on time. It can't get here fast enough.

Morgan Housel: Bank earnings have really surprised me. And not because they were good or bad, but blatantly fake. The two problem banks, Citigroup and Bank of America, both reported big profits entirely made up of asset sales. Raising a few bucks with an occasional garage sale is handy in times like these, but it doesn't reflect true earnings power, and it gives investors a false sense of hope.

And then you think, gee, we have interest rates at zero, and these banks still can't earn real profits without one-time gains. That's like firing caffeine straight into someone's veins and still having 'em fall asleep on you. When bank analyst Meredith Whitney recently said "the underlying core, earnings power of these banks is negligible," she wasn't joking. 

Alex Dumortier: The headlines have been a stockbroker's dream come true this earnings season, with earnings "beats" by high-profile, bellwether stocks such as JPMorgan Chase, Intel, and Caterpillar (NYSE: CAT  ) . But there is more: With second quarter results now in for over half of the companies in the S&P 500, it's the frequency with which companies have posted stronger-than-expected earnings that looks surprising: By my calculations, approximately four out five reporting companies in the index beat their consensus earnings-per-share estimate.

However, once you do a little scratching, the picture is less cheery:

  • Half of the companies failed to meet/exceed the consensus revenue estimate.
  • Even in sectors that are considered to be "defensive," the percentage of companies that failed to meet/exceed revenue expectations is high: health care, 41%; and consumer staples, 61%.

Have the last two weeks changed your views at all?

Dan Caplinger: No. Despite the emphasis on those companies that beat expectations, you've seen a fair mix of companies -- Amazon.com (Nasdaq: AMZN  ) and Microsoft, most recently -- come in with disappointments. I fully expect the markets to keep oscillating between euphoria and fear as long as the economy remains on shaky ground, and investors will stay nervous until the government stops having to spend so much money toward stabilizing the financial system.

Anders Bylund: Fundamentally -- no. For me, investing is still about finding great companies at decent-to-grotesque discounts to their real value. Whether the Dow stands at 4,000 or 14,000, there will always be great individual stocks out there. I'm drooling over this stock right now, for example.

Tim Beyers: My views haven't changed. Tech still boasts some of the market's very best balance sheets -- Microsoft is an example -- and I'm most comfortable betting on businesses that don't have to borrow to fund growth. I'm in tech for the very long term.

Alyce Lomax: I'm not convinced that things are as "less bad" as people seem to think they are. People seem to be grasping at straws to find something to be happy about, and ignoring a lot of very serious bearish signs about the overall macroeconomic environment as they focus on "earnings beats." (And apparently the bleak quarterly tidings from UPS got lost in the feel-good mania.)

The unemployment rate is high and going higher, there is still a huge inventory of houses out there, many more people will foreclose, the government stimulus package has been a boondoggle, and the U.S. government, as well as many corporations and consumers, are overly indebted. Mr. Market may be clinically diagnosable as bipolar, but I think a little dose of realism is in order; that trip to Vegas really isn't a good idea, and that's what investors are doing when they're buying up shares of some of the most challenged companies.

Alex Dumortier: Not really. I'm not a curmudgeon, so I'll start by saying that, over the long-term, I'm optimistic about the prospects for the U.S. economy. Nevertheless, in the medium term, we are in for a very lengthy, tepid recovery -- even a "double-dip" recession can't be excluded. This season's earnings results appear to confirm that U.S. companies are exceptionally nimble when it comes to reducing costs in the face a difficult environment. However, there are limits to that process, and it can't fully compensate for the effects of a demand-driven recession. Expect these effects to be long-lasting, as unemployment will remain stubbornly high.

In sum, there's no going back to the "glory days" we experienced earlier in this decade when it appeared that the U.S. consumer could carry the entire world economy on its back. Investors need to adapt to that reality: Get exposure to international stocks and, domestically, focus on stable, well-financed businesses trading at reasonable prices.

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This roundtable article was compiled by Anand Chokkavelu. He owns shares of Microsoft and Citigroup. Amazon.com, eBay, and Starbucks are Motley Fool Stock Advisor recommendations. eBay, Intel, Microsoft, and Starbucks are Motley Fool Inside Value recommendations. The Fool owns shares of Intel and Starbucks. The Motley Fool has a disclosure policy.


Read/Post Comments (20) | Recommend This Article (53)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 24, 2009, at 4:44 PM, plange01 wrote:

    microsoft at $50 did a 2-1 split about 10 years ago to $25 today 10 years later its $23.45 in 10years microsft has done nothing.....to put it mildly they need a new ceo!

  • Report this Comment On July 24, 2009, at 5:21 PM, stockjock43 wrote:

    How can companies NOT beat these pathetic estimates and we rally on that? I am no bear or bull I just know when Wall st criminals are fleecing hard working Americans... I really hope they get what they deserve, and that means the worst possible scenario... scum of the earth these lowlifes, they are all Madoffs as far as I am concerned

  • Report this Comment On July 24, 2009, at 6:48 PM, peters46 wrote:

    I am bothered by companies that 'cut expenses' by using mandatory (usually 5-10%) personnel cuts. As Alyce Lomax said 'cutting some of their best talent and perhaps alienating customers'.The best talent does not lick boots, and the (non-)managers who got their management jobs that way get rid of the best for that reason, as soon as they have an excuse. And I don't care what the job is, all jobs require some training. In high tech, hiring people off the street at minimum wage (eventually to replace those previously cut) is extremely expensive. Where I worked once (making printed circuits), they did that, replacing $10/hr jobs with $5.15/hr jobs. But with no experience, the newbies were scrapping boards at the rate of $2-3000/day.And it would take a minimum of two to three months to properly train them. For some of the jobs six to ten months of training to do a reasonable job. They would have been better off getting rid of the non-managers in management jobs. Real managers have abilities that can't be taught in any school. Teaching management is like using only a book to teach bowling. The mandatory personnel cuts will come back to haunt each of those companies The company I was in went out of business for that reason, because they could no longer make the product with high quality at reasonable prices

  • Report this Comment On July 24, 2009, at 8:16 PM, 167163330 wrote:

    As a main streeter still trying to recover 45% of my losses in a 401K administered by wall street, analysts have no idea what wall street and wash dc has stolen from this country (or they do and would feed everyone a line of BS). I am working the hardest I ever have in my life to squeeze EVERY revenue stream from wall street and am totally willing to store every last dollar in the mattress (after prepaying my mortgage) until assets again become affordable. I no longer use VISA/MC to ensure that the 3% interchange fee is lost. I have rolled every asset away from wall street that is legally entitled. wall street will be dead soon as nothing has ever been produced from them, only capital skimming and destruction. good luck money changers, your days are numbered, hopefully the american public will wake up and take away the last thing you have left other than integrity and morals- your revenue streams and money.

  • Report this Comment On July 24, 2009, at 8:54 PM, NoMoeMoney wrote:

    Rally is just another bubble: wait till fall, it will pop rather loudly. Compaines can't keep laying off people they no longer have, selling assets they have sold or keep playing the better than expected game forever.

  • Report this Comment On July 25, 2009, at 1:13 AM, Goldtea wrote:

    Can anyone still remember crsis ? At least stock market don't. Listed companies are good at dressing up their window to look goods. Focus on short term delivery than the long term accumulation and strengthen their corporate position. Corporate are focus in delivery short term result than long term durability. They will spend much effort in strengthen their long term financial wealth as their compensation is designed gear toward short term performance. Corporate is work toward stock market demand than the long term survival of themselve.

  • Report this Comment On July 25, 2009, at 9:25 AM, Mccldwll wrote:

    Extremely curious that a 7/24/09 roundtable discussion of earnings wouldn't directly include aapl (only a generic link).

  • Report this Comment On July 25, 2009, at 2:11 PM, jesse2159 wrote:

    The Grand Illusionists (Wall Street) are at it again. Companies show "profits" that no one actually believes (except the evening CNBC Nitwits) banks are simply "giddy" over making obscene profits (that are really not profits, they're sales of assets, and pundets are pushing the "Big Lie" that the recovery is working. Unemployment is rising, under-employment rising faster, forclosures rising in both residential and commercial properties and credit card payments are falling. OK, you bring the smoke and I'll bring the mirrors.

  • Report this Comment On July 25, 2009, at 8:22 PM, jmessner wrote:

    I'm sure most of these profits are just coming from cost cuts and layoffs.

  • Report this Comment On July 25, 2009, at 10:17 PM, drericrasmussen wrote:

    The cost cutting and layoffs are indeed the source of the profits. But they also lay the groundwork for improvement. Even Bank of America's "earning a few bucks from asset sales" lays the groundwork for a subsequent focus on things it does well (or at least less badly). Creative destruction comes not merely from the demise of firms but also from the trimming from within firms. Often mistakes will be made and good staff will be retrenched and less-skilled boot lickers kept. But that releases talent into the job market for those firms who can see their prospects improving. The early phase of a recovery is always nerve wracking. But it is underway.

  • Report this Comment On July 26, 2009, at 9:28 AM, brwn8484 wrote:

    If your focus is on earnings, your company will do no better than the economy. A truly great company will treat its employees and customers with respect and put them first. A house divided cannot stand.

    If we have not learned that yet, then we all deserve the financial crisis that we now currently own. I find it highly ironic that after the one of the greatest financial crises in the history of mankind, we still dont understand that a sole focus on money (and greed) are not the best way to run a company.

  • Report this Comment On July 26, 2009, at 12:04 PM, VegasMartin wrote:

    I agree 100% with Buffett. Equities should be going up based solely on the loss of purchasing power of the dollar with all the government stimulus and bailouts. It seems almost foolish to invest in a 10-year bond at such a low interest rate -- by that time, you will have lost money on the bond if you take into account the effect of inflation over that time period. Go with equities!

    www.ShootTheBears.com

  • Report this Comment On July 26, 2009, at 3:58 PM, PacificGatePost wrote:

    Recessions inevitably deliver capitalism a bad rap.

    History shouts that dependence on government becomes dangerously habitual, and leads to loss of liberty. That goes for individuals, as well as for businesses.

    http://pacificgatepost.blogspot.com/2009/07/government-vs-ca...

  • Report this Comment On July 26, 2009, at 7:59 PM, DBrown7 wrote:

    So earnings by and large are lousy (AAPL being one of the exceptions). Is anyone surprised? By the same token, is anyone surprised that the market is up modestly this year? The lousy earnings, and then some, were baked into the 37% drop in 2008. The market is a forward looking mechanism. This is why Buffett is saying now is the time to buy for long term investors. It amazes me that so many praise Buffett as the greatest investor of his time, but how few actually listen to him.

  • Report this Comment On July 27, 2009, at 12:25 PM, Melaschasm wrote:

    "It amazes me that so many praise Buffett as the greatest investor of his time, but how few actually listen to him."

    This fact is why I move my wall street controlled 401k mutual funds to an IRA which I control as quickly as possible. I have a 30+ year investment horizon, so it does not make sense for my money to be invested by someone who has a 1 to 2 quarter investment horizon.

  • Report this Comment On July 27, 2009, at 1:37 PM, Classof1964 wrote:

    There are two additional factors people need to consider in respect to the current market and earnings. If one looks at real earnings, not pro-forma earnings or earnings in nominal dollars, many stocks, even the S&P would be trading today at levels above their historic trend lines. I would guess that we have a long way to go to get back to those trend lines, years of either sideways markets while real earnings catch up, or more downsides on the averages to wring out inflated, over-leveraged prices.

    As for the earnings, I recall that Congress not so long ago pressured the accounting standards people to let companies fudge their pension liabilities and assumptions. If a company uses an inflated estimate of future earnings for its pension fund, it can and does add the surplus to its annual earnings. Magic to prop up inflated, nominal earnings.

  • Report this Comment On July 27, 2009, at 4:57 PM, Beanfarmer wrote:

    Morgan Housel's comment that bank interest rates are at zero is blatently false. Like many others, Morgan is under the impression that all banks in the United States received TARP funds that carry a zero interest rate. Morgan should read some of the TARP documents on line. Those banks that received these funds are paying 5%, which is greater than and raises their average cost of funds, and the 5% excalates to 7% after some years if not paid back. The only funds a bank does not pay interest on is that group called demand deposits.

  • Report this Comment On July 27, 2009, at 5:13 PM, Beanfarmer wrote:

    Seeking Alpha reported on Thursday, “Goldman Sachs became the first major bank to completely shed its bailout ties, paying $1.1 billion to redeem the government’s TARP warrants … With the warrant redemption and the $318 million Goldman paid in dividends on its $10 billion TARP aid, taxpayers received a 23% annualized return for the nine-month transaction.”

  • Report this Comment On July 27, 2009, at 8:17 PM, slpmn wrote:

    I'm with the guy with an SSN for a username. The best way to get rich from Wall Street is to work there. For the normal investing crowd, pray you happen to retire during the right 5-year window.

    Beanfarmer is missing the point. TARP funds were a tiny fraction of funding costs for a big bank. Much of their real costs are short term in nature, and short term rates are at historic lows due to current monetary policy. On the lending side, meanwhile, competition is way down so they can all be choosy about whom they lend to and at what terms. Bottom line is, they should be printing money right now. When you take out things like one-time gains and trading/I-banking revenue, they aren't, and that is a bit scary.

  • Report this Comment On July 27, 2009, at 8:26 PM, TMFHousel wrote:

    Beanfarmer:

    "Morgan Housel's comment that bank interest rates are at zero is blatently false. Like many others, Morgan is under the impression that all banks in the United States received TARP funds that carry a zero interest rate."

    Easy there. I never said TARP funds are at 0%. It's the Fed funds rate that's at zero.

    -Morgan

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