Archive for category: All Positions

With another set of quarterly earnings being reported, clients probably notice a lot of large stock moves in reaction to the news.  Often the stock moves seem unrelated to the earnings news.  Why did Apple and Facebook trade down after easily beating Wall Street estimates?  Why did Alphabet trade up and Comcast trade up when they also beat estimates?

Beyond the old adage that “traders got to trade”, there are three things happening.  First, investors adjust expectations right up until earnings are reported.  The “whisper” estimate can often be far ahead of analyst estimates.  This was the case for Facebook where blow out results from Alphabet, Snap, and Twitter had raised expectations such that the earnings beat the company reported was not a surprise and actually fell a little short of the whisper.  Second, Wall Street is more concerned with the future than the past.  This may be especially the case currently given the reopening of the economy seems to obviously suggest high earnings gains that will dissipate as time passes and pandemic’s economic impact recedes.  Investors look to “guidance” provided by management about future quarters.  Apple was an example this quarter as the company unexpectedly suggested that supply chain issues will slow the growth of iPhone sales over the balance of 2021.  Apple had avoided the supply chain issues plaguing so many other companies.  Third, how investors, especially traders are positioned heading into the earnings report impacts initial trading reactions.  This aspect is a combination of the first two points.  Traders can easily get caught too bullish or too bearish and be forced to quickly adjust positions.

The earnings reaction game is summarized well by our friend and fellow money manager, Todd Harrison:

We agree with Todd and extend his timeline to 156 earnings cycles or 29 years!!!

Between Wednesday’s market close and Thursday’s market open, four stocks held widely by Northlake clients reported earnings and held conference calls. Apple (APPL) did quite well, NII Holdings (NIHD) was solid, Regal Entertainment (RGC) was as expected, and Comcast (CMCSA/CMCSK) was a little below my expectations. Overall, I am quite satisfied with the start of earnings season as far as Northlake stocks are concerned. Here is a brief recap of each report:
Apple reported another great quarter. Following a day or two of controversy over the first weekend sales of iPhones, Apple reminded us that business momentum in Macs and iPods remains excellent. Earnings of 92 cents crushed analyst estimates of 73 cents. Revenues were a little better than expected as Mac sales came in at 1.7 million units vs. estimates of 1.6 million and iPod shipments of 9.8 million were at the high end of estimates. The big story, however, was margins which again expanded sharply as Apple’s brand strength is allowing it to maintain prices as commodity costs for memory collapse. Looking ahead, management is assuming that commodity costs increase and new products have lower price points, so guidance calls for EPS of just 65 cents in the September quarter. I expect that to be too low but memory prices have definitely increased. Management also did a good job on the call of reigning in overly bullish iPhone estimates. Overall, Apple proved that its operating momentum remains intact and that future earnings power maybe above street estimates. I see another 15-20% upside in the stock on the basis of new product introductions that will drive December quarter earnings.
NIHD reported better than expected subscriber growth, in line revenues and EBITDA, and a few penny shortfall in EPS. The stock fell sharply on Thursday but I think that was due to the market not the earnings report. Looking ahead, management raised 2007 guidance for revenue, EBITDA, and subscriber growth. More importantly, NIHD announced new investments to expand the networks in Brazil and Chile. Brazil has been performing great the last few quarters and is a very large market. Chile is a brand new market with significant potential and a profile that looks favorable for NIHD’s push-to-talk Nextel cellular service. The timing of the new investments is good as NIHD has completed the expansion of its network in Mexico, its largest market, and will begin to reap the financial benefits as subscriber growth accelerates with launch expenses winding down. Brazil and Chile should insure an another leg of growth that will extend the outlook for at least 25-30% growth annually out to 2011. NIHD is a true growth stock with substantial upside as long as Latin American stock markets do not collapse.
Regal Entertainment’s results closely tracked the 1% increase in the box office for the second quarter. Initial estimates of 2Q box office called for an upper single digit gain which left me worried that the earnings report would disappoint investors. However, the stock has held in well even as the market had dropped indicating that the pullback in the shares earlier this month compensated for weaker than expected box office. July is off to a fantastic start with box office up 11% and a strong film slate against easy comparison for the rest of the summer. I’d like to take profits in RGC shares for clients that don’t need high income if the renewed box office momentum pulls the stock back to new highs. I think that will happen.
Comcast reported mixed results that were greeted poorly by investors. The fact that they reported mixed results on such a bad day in the market led the shares to perform worse than reality. Revenues and operating cash flow grew 12% and 13%, respectively, just short but very close to estimates. Digital TV and VOIP telephony subscribers comfortably exceeded estimates while basic cable TV and high speed internet subscribers fell short. During 2Q, Comcast made a huge effort to ship digital TV set top boxes ahead of new regulations on July 1st that requires new box technology. This effort hurt the execution in other products and held back the results. I am very confident that operating trends will accelerate in the second half of the year. The acceleration should allay investor concerns about competition from Verizon and AT&T and lead the stock to much higher levels.

According to data from TNS Media Intelligence, advertising spending in the U.S., excluding paid search, fell by 0.3% in May 2006. According to TNS, this is the first comparable monthly decline since the advertising recovery began in May 2002. Network TV and newspapers suffered the biggest declines during May. Areas showing growth included non-search Internet advertising and Spanish language TV networks.
Even with May’s decline, ad spending as measured by TNS is up 3.9% for January through May but compared to 1Q06 GDP growth of 5.6%, that is a poor performance. In fact, one notable facet of the current economic expansion is that advertising growth has lagged GDP growth. Historically, advertising expenditures rise faster than GDP when the economy is expanding, which is why the media is classified as a cyclical growth industry. This year’s slower-than-GDP advertising growth is especially troubling given the fact that May’s downturn coincided with 2Q06 GDP growth of just 2.5%. Plenty of forecasters think that even slower growth lies ahead for economy, possibly even a recession….

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In the extended entry, please find an update on individual stock positions currently broadly held across client accounts. Click the “Continue Reading” link immediately below to see the updates on Apple Computer, Central European Media Enterprises, Lions Gate Entertainment, Motorola, Sears Holding, SBS Broadcasting, and Walt Disney….

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