The Quarter of Awe and Suspicion
IT'S THE ALL-STAR BREAK of the corporate earnings season, and so many companies are putting up steroidal numbers that the spectators are watching with awe and suspicion.
The awe is prompted by the sheer statistical power of the results. The suspicion comes from a sense that they represent peak performances unlikely to be repeated any time soon.
With half of all big companies having delivered first-quarter results through last week, profits are so far surpassing forecasts by an unprecedented margin.
Nearly four out of every five companies has beaten Wall Street's official estimates. The overall increase in earnings over a year earlier is 26% to date, almost eight percentage points ahead of forecasts -- the widest margin of victory since Thomson First Call began keeping score a decade ago. There have been so many "congratulations" offered on quarterly conference calls, it's as if every CEO is a bridegroom on a receiving line.
Yet the well-wishers, on balance, haven't put much money behind their congratulations, as the broad stock indexes were little changed after a down-and-up week. The Dow Jones Industrial Average edged higher by 20 points, to 10,472, with nearly the entire rise attributable to Microsoft's 9% advance on its strong profit news.
The Standard & Poor's 500 added six points and finished at 1140. The Nasdaq regained almost exactly what it lost the prior week, rising 54 points, or 2.7%, to 2049. Microsoft's climb, eBay's surge to a new high on impressive results and a lift in the recently pressured semiconductor group were largely behind the bounce.
That stocks have barely budged over the past two weeks, despite the bountiful profit news, speaks to a couple of nagging concerns.
The most apparent point of anxiety last week was decidedly macro: the course of interest rates. Federal Reserve Chairman Alan Greenspan led a group of Fed officials in making public remarks viewed as preparing the markets for higher rates. While hardly hawkish, the remarks focused enough attention on the standard-issue fear of traders to allay some buying interest. If nothing else, the widespread fixation on rates presents an easy excuse for the noncommittal behavior of a market that hasn't made a new high since early March and remains in a tight range.
Thursday's out-of-nowhere thrust higher, which boosted both the Dow and S&P 500 by 1.4%, was, by all accounts, based on mechanical index buying. The prices still count, regardless of the buyers' motivation, of course, but it isn't clear that the action directly reflected specific corporate or economic news.
One reason stocks may be shrugging off much of the nice earnings news is that analysts spent the first quarter boosting profit forecasts, to an unusual degree. Typically, Wall Street starts out a bit too optimistic and then has to lower its sights, only to have companies beat the final estimates. Last quarter, expectations never were pruned.
That means the course of profit forecasts for the rest of the year could matter. First Call is estimating that this quarter's 21%-or-better final profit growth will be followed by a 20% rise in the second quarter. But industry analysts collectively still predict only 15% growth in the second quarter, suggesting some upside potential in the analysts' numbers.
From there, however, the expected percentage increases go to 14% in the third quarter and 13% in the fourth. That's called deceleration. And while stocks don't tend to fall apart just because earnings growth slows, it can mean the easy money has been made. At such times, investors tend to start focusing more closely on how much they're paying for those earnings.
If, in fact, the companies of the S&P 500 do show a 20% gain in profits in the year's second three months, it would mark the fourth straight quarter of at least 20% annual increases. That would be the first such streak since the period from July 1999 to June 2000.
It would be too alarmist to draw any direct parallels between the market's behavior beginning near the end of that previous streak and the current period. Even though stocks today are expensive by most historical measures, and there are very few truly cheap ones, the market's valuation isn't near the wild heights of the 2000 peak. Which, in itself, doesn't mean it is immune to unpleasant surprises.
BEARISH TRADERS SEEM TO have turned away from some of their favorite toys, as short-interest levels on the big exchange-traded index funds dropped hard in the month ended April 15.
In the short interest data released Wednesday, the outstanding number of shares sold short in the Nasdaq 100 Trust (known by the handle QQQ), sank by 24%. The S&P Depositary Receipts, or SPDR, short interest tumbled 28%. And other, narrower index exchange-traded funds saw the shorts walk away in similar proportions.
ETFs are particularly suited for making bearish bets, because they are highly liquid, inexpensive to trade and can be sold short on a "downtick" or when prices are falling, something not allowed with individual stocks. Active professional traders, notably hedge funds, tend to dominate the activity in ETFs, making them useful as a gut check for the sophisticated fast money types.
The QQQ's underlying index, the Nasdaq 100, was up a bit from March 15 to April 15, though there was an interim selloff on which shorts could have been covered as profit-taking. Still, such a marked dissipation of bearish bets so quickly could tempt contrary thinkers to wonder whether the Street is a bit too bullish, or at least somewhat complacent about the possibility of a rapid market drop. Perhaps.
The last time short interest on the QQQ was as low as the recent reading was mid-August, which preceded an 8% one-month gain in the Nasdaq 100. That calls into question the use of ETF short interest as a pure contrary sentiment indicator. Says Chris Johnson of Schaeffer's Investment Research in Cincinnati, who monitors sentiment trends: "For now, implications are neutral, except that it makes one believe that there is some optimism creeping back into this market."
He adds, however "the typical buying that is associated with a short-covering rally has been lightened with the considerable drop in short interest." Just as the major indexes have garnered little upside despite the expenditure of near-record inflows into stock mutual funds, the lack of a sustained rally after a lot of short-covering might indicate a tired market laboring under ample supply from sellers, Johnson suggests.
There is an alternate interpretation of the flight of shorts from exchange-traded funds. It could be that hedge funds and other investors who go both long and short are seeing greater opportunity in shorting individual stocks rather than betting against the indexes. The 2% increase in overall short interest on the New York Stock Exchange supports this possibility.
This would make sense, given the increasing disparity in performance between winning and losing stocks lately, following a year in which nearly every stock went higher. In a broad, upward trending market, shorting the indexes is the default position, almost a timid or defensive choice. In a churning, more difficult environment, bolder, stock-specific bearish plays seem riper.
There's no saying the new short candidates will by necessity flounder. But these signs point to a less generous market, one that coldly rations its winners and inflicts more pain on the losers.
IN THIS COLUMN'S CONTINUING DISCUSSION of ways to handicap stocks' reaction to earnings news, last week's market again spotlighted the importance of a stock's sentiment profile during profit season.
Two of the mere handful of major stocks that managed to rally significantly on positive earnings surprises -- Caterpillar and Ford -- both faced a skeptical Wall Street. Each company also surpassed earnings forecasts by such wide margins that it was difficult to assail the numbers as anything but impressive.
Only six of the 20 analysts following Caterpillar were recommending the stock when Cat posted net of $1.16 a share Thursday, trouncing projections of 70 cents. Selling prices held up, top-line momentum was admirable and management was upbeat about the rest of the year. The stock jumped nearly 4% on the report.
Ford, with five Buy ratings versus seven Holds and three Sells, more than doubled the Street EPS forecast Tuesday and its shares surged 10% on the day.
The buying rush into these stocks wasn't wholly because of the negative predisposition of the Street, of course. They also were helped by a brief revival of interest in deeply cyclical stocks. The cyclical-versus-defensive debate has been central so far this year, with the cyclical names having ceded leadership to less economically dependent groups.
The question regarding the industrial cyclicals, including Ford and Caterpillar, is whether the likely peak in economic momentum in the previous or current quarter spells the closing of their window of stock outperformance.
Caterpillar, which fell one cent on the week, to 81.96, is already trading at a slightly higher multiple than the broad market, based on expected 2004 earnings. And the stock has repeatedly been thwarted in the low- to mid-80s each time it's reached that area, dating back to late December. One thing that might help the company this time around: the prospect of a boon from a massive road-construction bill that is now the subject of wrangling in Washington (see D.C. Current).
UBS analyst David Bleustein Friday downgraded three machinery stocks on the premise that the environment can't get much better for them. In cutting his ratings on Deere, Ingersoll-Rand and Parker Hannifin, the analyst says the group has benefited from a falling dollar, low interest rates and rising commodity prices. The stocks, which all sold off appreciably on the moves, already build in these benefits through the 2005 earnings year, he figures. He kept a Neutral rating on Cat.
Ford impressed investors with its profit-margin improvement and its ability to raise vehicle prices slightly. The market had already been building in hope for a big year in overall industry vehicle results, following General Motors' recent forecast for 60 million global unit sales this year.
The pop in Ford shares opened a wider-than-usual valuation disparity with GM stock. Ford now trades for more than 11 times expected 2004 profits (though this year's estimates could well rise). GM, meanwhile, fetches just seven times 2004 consensus earnings forecasts.
Neither stock would likely fare very well if more interest-rate fears hit the market, or if the cyclicals again falter. But the stocks of Ford and GM typically behave as if they were partners in a three-legged race, which could mean Ford's 12 percentage-point sprint ahead of GM last week is only a temporary advantage.
THE TENDENCY OF STOCKS HATED by brokerage analysts to show surprising strength after good news is no broad indictment of the analysts' abilities. It just shows that when opinion becomes too one-sided, the opposite argument has a temporary advantage.
In fact, analysts' ability to make money for their clients by shifting ratings has recently been documented in an academic paper by T. Clifton Green of Emory University's Goizueta Business School.
Green found that analysts' upgrades or downgrades can be traded on profitably by clients who get first access to the moves. Immediately buying stocks on upgrades and selling them short on downgrades produced annualized excess returns of 30% after trading costs, but all the gains would have come by the time the ratings shifts were made public by newswires or television.
At a time when securities firms are looking for ways to demonstrate that sell-side analysts add value without linking their work to investment banking, the study could offer ammunition in convincing clients to pay brokerage houses for research.
Rolling With Rates: Concern about interest-rate hikes weighed on the Dow despite excellent earnings reports. Its 20-point gain was largely the work of Microsoft, up $2.38 on the week.
Green also found that there tends to be a powerful client response to the ratings changes, putting the lie to the standard line of money managers that they don't use Wall Street research to make buy and sell decisions.
THOUGH IT'S THE SLOW SEASON FOR box-office blockbusters, Hollywood's handicappers were busy last week as MGM was apparently placed up for grabs.
Sony and a few buyout firms were reported to be joining to bid for the venerable studio, and Friday Time Warner was also said to be considering an offer. The floated price tag of $5 billion would value MGM close to 25 times expected free cash flow, a fancy price that builds in the potential future value of its vast library of films.
Any fresh attention on independent studios and movie archives ought to work to the benefit of Lions Gate Entertainment, a small but shrewd producer of movies with a library of some 8,000 films.
Lions Gate shares are up from 2 to about 6 in the past year, as investors have warmed to the company's niche franchise in Hollywood and have applauded its acquisition of Artisan Entertainment.
The studio has a knack for making provocative independent movies in which big stars work cheap. Monster's Ball with Halle Berry, Dogville with Nicole Kidman, and the forthcoming Godsend with Robert DeNiro are all examples. Last year, it had two critics' favorites, Girl with a Pearl Earring and The Cooler. Lions Gate keeps its financial risk low and looks to milk the upside from home video and overseas releases.
The current Marvel Comics tie-in, The Punisher, in its second week in theaters, will probably at least break even this weekend. According to SG Cowen's Lowell Singer, the release of Open Water this summer could generate nice financial leverage. A trapped-at-sea shark flick, the movie is billed as Jaws-meets-The Blair Witch Project. And with an acquisition cost to Lions Gate of just $2 million, Singer thinks the upside is considerable.
In some ways, viewing Lions Gate as a play on big new-movie openings misses the point. Its library can be mined for DVD releases for years to come, even if its backlist isn't nearly as storied as that of MGM.
The company, with an equity market value of $540 million, is projecting positive free cash flow of $80 million in the current fiscal year ending March 2005. Rob Routh of Natexis Bleichroeder thinks the stock can trade at 20 times his slightly lower estimate of $70 million in free cash flow, which translates to more than 11 for the stock.
Including debt, Lions Gate's enterprise value is just over $900 million, or about 11-times forecast free cash flow. MGM now trades at an enterprise value to free cash flow multiple of 23. One wouldn't have to place the two studios on a par to find a reason Lions Gate is worth a bit more than the current quote.
既惊且疑的一个季度
本轮收益发布期开场便是全明星阵容，众多公司公布出的业绩数字可说是让观者既惊且疑，惊的是这些数字仅从统计角度而言著实令人赞叹不已，而之所以要疑是因为如此出色的业绩实可谓短期内恐难再现的登峰造极之作。
截止到上周，大公司中已经发布第一财政季度业绩者已过半数。而根据已有数字，这些公司的业绩大大超出了先前的预期，超出幅度之大堪称空前。
接近五分之四的公司收益超出了华尔街的预期，总体业绩与去年同期相比增长了26%，增幅比预期高出了8个百分点。这是自Thomson First Call于10年前开始跟踪纪录公司业绩以来前所未有的现象。在各家公司举行的有关季度收益的电话会议上，"道贺"声此起彼伏，各公司的CEO们彷佛新郎一般，满面春风地接受著每一位来宾的恭贺。
然而道贺者贺则贺也，总体而论，他们并没有头脑发热地伴随著道贺声而扔出大把大把的钱，因为股市总体指数经历了一周的起起伏伏后并未出现太大变化。道琼斯工业股票平均价格指数全周仅上涨20点至10472点，即便这一点涨幅也几乎全是拜微软(Microsoft Corp., MSFT)所赐。受强劲业绩推动，微软股票全周累计上涨了9%。
标准普尔500指数一周来上涨了6点，收于1140点；那斯达克综合指数上涨54点以2049点报收，与前一周跌幅差不多正好涨跌相抵。微软和eBay Inc. (EBAY)股价的大幅攀升以及半导体类股摆脱近期颓势是导致那斯达克指数上涨的主要原因。与微软相仿，eBay股价受公司强劲业绩推动一路飙升创出了新高。
虽有各公司的骄人业绩，股市总体而言却徘徊不前，这恐怕主要要归因于市场上某些挥之不去的隐忧。
最显而易见的忧虑无庸置疑，当是来自宏观经济方面，具体说就是利率的走势。以格林斯潘(Alan Greenspan)为首的一批联邦储备委员会(Federal Reserve, 简称Fed)官员上周纷纷发表公开讲话，市场将其视为Fed准备上调利率的先兆。这些讲话的语气虽然谈不上强硬，却已足以削弱投资者的部分买盘兴趣。如果找不出其他原因，那么市场对利率决策的普遍关注倒是一个现成的借口，可以拿来解释市场何以自3月初以来一直未能再创新高，却一直维持窄幅波动的局面。
股市周四出现了原因不明的大幅攀升。归纳各方所言，当属程式性指数买盘所为。无论买方动机如何，价格当然还是不可忽视的一个因素，但买盘到底是针对个别公司消息作出的反应还是宏观经济因素使然眼下却不得而知。
有一个原因或许可以解释市场为什么会对众多出色的收益数据熟视无睹，那就是各家分析师整个一季度都在纷纷上调各公司的收益预期，频繁程度实在非同寻常。华尔街分析师通常的最初预期都有点过于乐观，之后总是不得不做一定程度的下调，最终公司的实际业绩往往会超出其下调后的预期。但在上个财政季度里这些分析师从未下调过他们的预期。
这就意味著今年剩余时间里的业绩预期情况可能会具有相当的重要性。根据First Call的预期数字，标准普尔500指数成份股公司本季度总体利润增幅有望超过21%，二季度增幅也会继续达到20%的水平。然而行业分析师对公司二季度利润增幅的预期只有15%，预示这些分析师的预期数字仍有潜在的上调余地。
但是分析师对之后两个季度收益的预期分别只有14%和13%。这便是所谓的增长减速。虽说股市还不至于因为预期公司收益增长减慢就大幅下挫，但这可能意味著收益增长效应所带来的获利机会已经过去，这种情况下，投资者会开始仔细考虑是否还要继续介入。
实际上，如果标普500公司今年第二个季度果然能实现总体20%的利润增长，那么这将是它们连续第四个季度收益增幅保持在20%以上。标普500公司上一次实现连续4个季度20%以上的利润增长是在1999年7月至2000年6月这段时间。
拿那以后的股市表现和现在作比较可能未免有些杞人忧天。尽管用大多数历史标准来衡量，现在的股票价格都比那时候高，而且如今确实便宜的股票也寥寥无几，但是当前股票市场的市值尚未接近2000年狂飙时期的最高点。不过话说回来，这本身并不意味著我们所不愿见的意外就不会发生。
