Bank of America (BAC) earnings beat, Nucor (NUE) moves from Strong Buy to Buy and more
A Note About Earnings Season
You may have noticed that during earnings season, I rarely make note of the year-ago quarterly earnings per share (EPS) number. That’s because I personally find the number to be irrelevant for today’s market action. In my estimation, the market reacts to this quarter’s number in relation to the consensus estimate, but not in relation to last year’s number. The market already knows if a company’s quarterly performance looks better or worse than a year ago, and that’s why it’s a non-event at reporting time. The market’s curiosity is therefore focused on how much better or worse this quarter’s EPS looks vs. what is currently expected. Thus, we quickly gauge the quarterly successes and failures against the analysts’ consensus earnings estimates.
In this week’s update, I mentioned that the stock market had another recent run-up and was probably due to rest. In that light, good earnings reports might not be rewarded with share price gains. Lo and behold! Along came third quarter earnings beats from JPMorgan Chase (JPM) and Citigroup (C), and their share prices declined.
It’s important to understand these seemingly trivial market nuances so that when your share prices don’t act the way you had anticipated, you don’t overthink it, worry or sell your stock. I admit I am very calm about share price fluctuations, and if I ever seem too cavalier about market volatility, go ahead and send me an email and smack me upside the head. Right now, I’m as calm as the VIX.
Bank of America (BAC – yield 1.9%) reported third-quarter earnings per share (EPS) of $0.48 vs. the consensus estimate of $0.45 (or $.46*) and vs. last year’s reported $0.41. (*Note that there are a few sources of consensus estimates, and therefore their numbers can occasionally vary by a penny.) The earnings beat was attributed to higher net interest income (NII) and lower expenses. I think I mentioned a couple of times this year that, among large-cap banks, Morgan Stanley believes that Bank of America is best-positioned to capitalize on rising interest rates. We’re now seeing that in the quarterly results. Lather-rinse-repeat: we’ll probably see interest rates rise for many years to come. I anticipate holding this stock for a long time.
Quarterly expenses came in lower than in many recent years. The company is on-track to meet its 2018 expense target, and the expense ratio surprised on the downside too. We’ll probably see earnings estimates rise again next week, and that’s always bullish news.
I love this stock. It’s got huge profit growth on the horizon, and its recent share price breakout was followed by a small pullback. Buy BAC today, buy it next week, and buy it until I give you the “10% warning.” (That’s when I think a stock has only about a 10% capital gain remaining before hitting my price target.) Strong Buy.
Other News…
Steel stocks continue to rise, although the two that we’re following have upside price resistance in sight.
I’m moving Nucor (NUE – yield 2.6%) from Strong Buy to Buy, with a price target of 64, where it last traded in December 2016. I will move the stock to Hold as it gets closer to the price target, which could surprise us and happen quite soon. I have a strong feeling that Nucor is going to be one of those stocks we continue to hold that experiences upward revisions in earnings estimates, and it will eventually rise past the mid-60s. Therefore, my rating changes are not about quality, they’re simply about my estimation of near-term capital gain potential. I love the outlook for the steel industry and steel stocks. Buy.
Commercial Metals (CMC – yield 2.3%) is having a great week, rapidly rising toward my price target near 24, where it last traded in December 2016. As with Nucor, I will move the stock to a Hold very soon, simply because the run-up will likely come to an end at 24. However, due to excellent capital gain prospects, I’ll keep CMC in the portfolio for additional capital gains in 2018. When the stock seems ready to subsequently break out—or when it experiences a decent pullback—I’ll continue to alert you to timely buying opportunities. Buy.
BP plc (BP – yield 6.0%) continues to rise. Growth investors should put in a sell limit order at 42. The stock peaked at 43 in 2014. Odds are very strong that it will not be able to push past 43 without some serious consolidation in the low 40s. Dividend investors should hold the stock. When BP is ready to rise past 43, I will consider recommending it again, because it’s still got attractive growth and value prospects. Hold.
Chipotle Mexican Grill (CMG) is acting well, pushing up against the top of its trading range. Might we see a near-term breakout? I’m holding my breath. Buy.
Molina Healthcare (MOH) is down with market volatility spurred on by potential changes in healthcare policies and subsidies. The impact of such changes is most likely to affect hospital stocks, and not likely to affect any company’s bottom line for many months to come. There’s probably going to be a lot of sideways trading in MOH for quite a while, with repeated opportunities for traders to buy and sell. I’ll keep you posted on news and changes in earnings estimates, which are more relevant to shareholders than short-term volatility. Strong Buy.
Quanta Services (PWR) has an extremely bullish price chart. The breakout could easily happen this month. Strong Buy.
Hold.
Weyerhaeuser (WY)
just broke out to new highs. That’s bullish! Buy WY now. Strong Buy.The market is letting go of worries about catastrophe losses at XL Group (XL – yield 2.1%), and the stock appears immediately capable of rising back toward its July high above 46. Buy.