What the Market Wants: Key Week for the Quarter
This week could be very telling in what to expect from the markets in the first quarter and the rest of 2014 as a number of important companies report Q4 and 2013 year-end earnings. Today brought in some stock moving releases from Caterpillar Inc. (CAT), Apple Inc. (AAPL), Seagate Technology (STX).
CAT reported better-than-expected earnings before the market opened along with a $10 billion buyback program.
AAPL reported after the close, but it did not impress with lagging sales and outlook targets. Despite assurances from AAPL executives who said they were pleased with the results, AAPL was down sharply in the aftermarket. Revenues were a bit ahead of expectations while earnings were well above consensus estimates of $14.50. Cash and cash equivalents totaled a record $159 billion. So why are the shares selling off? iPhone sales were very disappointing to many. Coupled with Android’s reported growing dominance in new phone sales and stronger sales from Windows phones, the lowered guidance for the iPhone was just too much for the market to accept. A tough call in our opinion, but it’s certainly not great news.
STX revenues were in line but earnings missed by $0.07, about 5% below expectations. That’s probably enough to warrant the 7% drop in the aftermarket considering the low valuation placed on STX shares. STX guidance was to meet expectations for the year.
There were numerous other earnings releases with more beating than missing.
The other big news for this week is the plethora of economic releases combined with the Fed’s two-day meeting. New Home Sales were short of expectations today, but the week will bring Building Permits reports tomorrow along with the Case-Schiller Home Index pricing report. And on Friday, we will get the Pending Home Sales report.
The first major builder to report, NVR, Inc. (NVR), beat earnings handily and rose in the aftermarket—the homebuilding industry will likely be based on the totality of this week’s building reports as the week wraps up.
The market will have much more to digest as tomorrow brings chain stores sales as well as the important Durable Goods and the Consumer Confidence reports. The Fed will release its target rate on Wednesday and any other information it chooses. On Thursday, we get our first look at Q4 GDP and the weekly Jobless Claims number.
Given the reception to today’s reports by AAPL and STX, it seems the market is ready to punish itself over disappointments of any kind. Clearly, it is a week for caution. However, the downdraft of the last four market days may have discounted the worst of the overall situation. We will not know until the week is over. Hedging via VIX related options may well be in order.
Meanwhile, we are still finding undervalued stocks (see below). The market data is also quite interesting with Small-caps having the best overall performance last week, last month, last 3 months, etc. (despite some tough days). The 30- to 90-day SectorCast has Financials pushing aside Technology for the first time in many weeks.
3 Stock Ideas for this Market
I selected the following stocks from a custom search looking for undervalued small-caps with recent upward analyst revisions to earnings estimates in MyStockFinder (*all data below from Yahoo! Finance):
The Greenbrier Industries Inc. (GBX) –Industrials
- Trading for 11x forward earnings estimates
- 33% projected EPS growth current quarter, 52% next quarter, 34% this year, 16% next year
- Analysts have revised EPS estimates up in the last 30 days
Maiden Holdings, Ltd. (MHLD)—Financials
- Trading for 14x current earnings and 7x forward earnings estimates
- Rapidly growing 3.9% dividend
- 300% projected EPS for the current quarter, 20% next quarter, 75% this year, 25% next year
Altra Industrial Motion Corp (AIMC)—Industrials
- Trading for 30x current and 15x forward earnings estimates
- Analysts have revised EPS estimates up in last 30 days
- 22% projected EPS growth for 2014