Unemployment is rising and stocks are going up. Oil prices are dropping and stocks are going up. Companies are beating quarterly estimates and stocks are going up.
Wait.... go back. Why is the last statement of the bunch a surprise? Doesn't it make sense for stock prices to rise if companies are beating quarterly estimates? Yes, it does. That's not a surprise at all.
What you should be asking is how companies are beating Q1 estimates. That's the important question that nobody is asking. That's how Wall Street institutions are tricking investors into buying above market value stocks while they sit back and laugh.
If you tried to hand someone a clear plastic bag with a piece of shit in it and say it's a gift, will the recipient look at it and accept it? No.
If you package the shit in a pretty box and put a bow on top and the person can't see what's inside, will they accept it? Most likely.
But when they open it and see that you gifted them a piece of shit, they're going to gift it back.
Wall Street has been setting quarterly estimates so low that companies can't lose. Then, investors are excited that estimates were beat and begin purchasing stock. But, as the second quarter goes on and sentiment is high, everyone will realize that the quarterly beats were all shit.
Stocks are a chess game and Wall Street is a move ahead
At the time of this writing, the Dow Jones (DJI) is trading at 24,559. The stock market has had a remarkable comeback since it's 38% drop last month. Wall Street has been telling us that stocks are going to go up and fundamentals don't matter.... until they do.
Wall Street institutions have been setting quarterly estimates at rates so low that companies are almost guaranteed to beat them.
If the company beats their quarterly estimate, then it looks fantastic in a headline and investors will begin to buy. As investors buy, buy, and buy some more, Wall Street is waiting. Watching. Smiling.
After investors have bought up millions of shares and share prices are overvalued, Wall Street will sell. And after they sell, they'll state the facts. The company that beat its quarterly estimate (the same estimate Wall Street set) actually has shit financials. Investors will panic, and they too will sell.
Stocks are nothing more than a game of chess and Wall Street has been playing longer than all of us.
Fundamental Analysis is long-term king
Yes, absolutely, 100%.
It's easy to ride the Wall Street pump up and sell off before the wave crashes. But, don't get stuck in a euphoric state of gains and forget to sell off.
Lets take a look at companies that beat quarterlies, but have financials so bad that they'd make Sears blush.
Bed Bath & Beyond (BBBY)
Retail stores have been taking beatings for years since online shopping has become increasingly popular.
Bed & Bath reported and beat their quarterly earnings estimate on the 15 of April and shares immediately gained 25%.
Wall Street estimated that the company would report $0.21 earnings per share, but the retailer beat expectations and reported $0.38 eps. Naturally shares rose, but lets breach the surface and look at more than just the Wall Street eps estimate.
Revenue dropped 6%
Sales at its bricks-and-mortar stores are down 10% over a one year period
A net loss of $65 million was reported for the first quarter
The company has lost 90% of their market cap in four years
Last year, they reported a net loss of $137 million for the entire year
The balance sheet shows $1.4 billion in cash and liquid assets, but also $1.5 billion in debt
Yes, the retailer beat Wall Street estimates, but why isn't Wall Street mentioning the shit financials? Because Wall Street wrapped up those shit financials in a pretty box labeled "BBBY beats quarterly estimates" in hopes that investors buy the stock before opening the box. By the time Investors open the box, Wall Street will have sold their shares and investors are left with shit.
Harley Davidson (HOG)
Vroom vroom. All of our lives we've heard motorcyclists zooming by on their bikes, but now the sound isn't always coming from a Harley.
Yesterday, the motorcycle company reported their quarterly and not surprisingly, beat Wall Street estimates.
They reported $0.45 per share, beating the Wall Street estimate of $0.40 per share. Yahoo! Shares have since increased a whopping 23% since investors heard the great news of a quarterly beating.
What is Wall Street not talking about though? The same quarter last year, the company reported earnings of $0.80 per share. EPS has dropped 43% in one year and shares are up 23%. Extraordinary, really.
Its also important to note that:
Market cap has decreased 80% since 2014
Net income is down 49% since 2014
Annual EPS is down 30% since 2014
For the past six years, Harley-Davidson has been on the downward slope. Their bikes are expensive, younger generations aren't interested, and they can't grow or maintain their customer base.
None of that is important though. They beat Wall Street's sham of a quarterly estimate, so the company must be a buy, right?
Not everything is at is seems. Investors should consider looking to see what's inside of the pretty box that Wall Street is giving us before getting excited. Not all companies that are beating their quarterlies are like Harley and Bed & Bath. There are superb companies beating their quarterly. It's important to separate the real winners and losers before investing because of a "quarterly beat" headline.
Of course, there are waves to be rode right now as almost all stocks are gaining. But all waves eventually crash and some faster than others.
Do your research, Financial Movers.
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DISCLAIMER: This article does not contain financial advice. Any and all market analysis is solely the authors opinion. Investors should do their own research before making any investment.