Earnings Season begins with Covid Numbers Still Rising
The Oxford primary definition of the word “conundrum” is “a confusing and difficult problem or question.” Most of us are familiar with this. Less popular is the secondary definition, “A question asked for amusement, typically one with a pun in its answer. A riddle.”
Riddle me this. How can fourth quarter earnings reports tell us anything about the future when Covid-19 numbers have been surging for the past three months? An algorithmic trading analysis that omits this variable is going to cause a lot of folks to suffer major losses in 2021.
Positive earnings reports spark momentum trading on Wall Street and drive stock prices up. It’s fair to say that companies showing reasonable profits in Q4 will benefit greatly this month. Those showing losses will not. Their stock prices will drop.
Reading Between the Lines to Turn Losses into Gains
The problem with earnings reports that come in above expectations is that the window is small for investors to make money. Stock prices surge within minutes of the release and you’ll miss the boat if you don’t have your finger on the trading trigger.
Negative reports are where the real potential is. Consider Alaska Air Group (ALK) as an example. Their earnings report for Q4, which they released on January 13th, was down 64% from a year ago. If that drives the stock price down, I will buy it in a heartbeat.
Airlines are a risky investment, but ALK is on my top five list for planes that will continue to fly long after the pandemic is over. Their dividend yield is twice the industry standard and their PE ratio hovered between 85 and 90 for most of 2020, despite Covid-19 setbacks.
Are you thinking Southwest Airlines (LUV) is a better play? They bottomed out at $23 a share in May and have yet to fully recover. The company lost $1.7 billion in 2020 and I don’t expect them to be competitive this year in the low-cost carrier market they’ve previously thrived in.
Is it Time to Buy into a Retail Resurgence?
The vaccine will kill the virus and a jubilant throng will emerge from isolation to flood retail stores and increase profits to previously unseen levels. No. I don’t believe that either. Online shopping was shutting down department stores long before Covid-19 hit us.
Retail is no longer measured by the number of customers who walk into a giant barn-like building with metal shelves and surly salespeople. Success is dependent on online and digital sales, so don’t offer excuses for poor Q4 earnings from big retail.
Target Corp (TGT) was the big winner for the 2020 holiday season. In-store sales rose 17.2% and digital sales were up 102%. It’s not a big surprise. They already crushed it in Q3. Expect more of the same for Q4 and buy them now before the official earnings report comes out.
My sleeper in this space is Big Lots (BIG). They don’t report until February, but their Q3 numbers showed a net sales increase of 18% during the heart of the pandemic. The share price is climbing right now, so this is one to take advantage of today.
Big Bank Earnings Won’t Alter My Investment Strategy
Share buybacks in December and the Fed signaling that it won’t raise interest rates until 2023 will result in healthy earnings reports for big banks this season. The one outlier might be Wells Fargo (WFG), but I wouldn’t touch them right now anyway.
I’m still focusing on IPOs. If you followed the suggestions in my “Boom or Bust” article from a few weeks ago, you’re seeing a nice gain on Affirm (AFRM) right now. It went public at $90 and went up almost 50% in twenty-four hours. I love it when a plan comes together.
In other updates, the iShares Microcap ETF (IWC) that I wrote about last month gained 33.84% in Q4 and Bitcoin (BTC) earnings are likely to buy me a summer house this year. I’ll continue to look for and write about new opportunities in both of these lucrative spaces.
Don’t get me wrong. I’m not saying that investing in big bank stock is the wrong way to go. I own my fair share of it. Their earnings reports will not alter my investment strategy. Banks are subject to regulation. With a new administration, those regulations could change.
As for the Covid effect, we’re not out of the woods yet and many of the changes we saw implemented in 2020 are likely to be permanent. There’s no going back. We’re in a new normal now. Use common sense when choosing your investments and you’ll do okay.
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