This earnings season has been a disaster.
One by one, Wall Street’s darlings have stepped forward to announce their latest earnings results and provide their best guesses on how business looks for the rest of 2016. And, one by one, the darlings have gotten crushed.
Blue-chip companies like Intel (INTC) and American Express (AXP) saw their shares fall around 10% when their earnings results failed to impress investors a few weeks ago.
[ad#Google Adsense 336×280-IA]Fast-growing stocks like LinkedIn (LNKD) and Tableau Software (DATA) fell 45% and 50%, respectively, last Friday when their results didn’t meet analysts’ expectations.
Even companies that performed well, beat expectations, and raised guidance for the future got dumped by investors after reporting earnings.
Alphabet (GOOG), for example, has lost more than $100 per share – more than 10% – since announcing its better-than-expected earnings report.
And Facebook (FB) – which surged 20% after a blowout earnings announcement – has given up nearly all of those gains since.
The rule of thumb for traders this earnings season has been to get out of the position before your stock reports earnings. It doesn’t matter how good or bad the report turned out, the stock has gotten hit…
It’s hard for the broad stock market to gain any ground in the face of that sort of selling pressure.
But the bulls have one last hope in the form of $115 billion technology giant Cisco (CSCO).
Cisco is the 800-pound gorilla in the technology sector. The company manufactures networking and communication devices. It makes the routers and switches that allow information to move through the Internet.
And it rules the market. Cisco owns 50% of the router market and 70% of the switch market. Its products are used by 85% of Fortune 500 companies. Chances are, if you’re on the Internet, a Cisco product enabled you to get there.
Cisco makes money. It enjoys gross margins of more than 60% and profit margins of almost 20%. Business is growing in nearly all of its operating segments and across almost all of its geographic regions. It generates billions of dollars in cash flow, which it often uses to buy back its own stock. And at $23 per share, the company yields 3.6%.
Over the past few weeks, the stock has been falling. Worries of an economic slowdown and a tough stock market environment are putting selling pressure on the stock.
Cisco shares are down more than 15% since the start of the year. And now, at less than 10 times earnings and at its lowest share price since October 2014, it seems that a poor earnings number is already factored into the stock price.
That opens up the possibility of an upside surprise when Cisco announces earnings after the market closes on Wednesday.
It doesn’t matter if Cisco beats expectations or fails to even come close. All that matters is the market’s reaction to the news. If shares continue to sell off from their already-depressed levels, we can forget about seeing any sort of sustainable rally in the stock market in the near term.
If value investors don’t step up to buy dirt-cheap blue-chip stocks once the risk of an earnings announcement is out of the way, then sellers will stay in control of the stock market.
On the other hand, if Cisco can rally on Thursday following its earnings announcement, it could change the tone of the market. That would be a sign that there are still buyers in this market for low-risk value stocks. And it could kick off at least a short-term rally in the broad stock market.
Best regards and good trading,
Jeff Clark
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Source: Growth Stock Wire