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This Earnings Season, Go Beyond Fundamentals


Keep an eye out for Mojo Multipliers and learn to "read the tea leaves".

Over the next week or so we'll get any negative pre-announcements that may be in the offing for technology and telecom companies. I'll be surprised if there are any more than a handful since the sectors remain in a recovery phase and few, if any, companies have pulled away from a cautious stance.

I'm a big believer in fundamentals, not just how the last quarter looked but what the outlook for the next 90 days is. However, just as beauty is in the eye of the beholder, the same perception issue holds true for fundamentals. When you're a hot stock, there's always a little more oomph in the numbers; when you're not, you're not.

Just for fun I pulled up the most recent results from nine companies. Three had their quarter ending in September, three in October, and three in November. I wanted to see what they reported versus consensus then look at guidance versus consensus.

It's completely anecdotal and the names were selected more to provide a variety of end-markets than a statistically significant sampling process. And before you say, "What about…" remember that not all companies provide guidance.

What you see in the last quarter results is that just about everyone, with the exception of Autodesk (ADSK), beat street consensus. Most of it was fairly modest (i.e. low-single digits) but Applied Materials (AMAT) was clearly well ahead of the street.

When it came to guidance, Applied Materials' was well above street consensus with many others in the mid-single digit neighborhood. But if there was a disappointment in forecasting, it had to be Apple (AAPL), which simply guided "in-line" with the street.

Given that as a backdrop, did the stock perform in-line with the fundamentals? No, because some have the Mojo Multiplier and others don't.

Amazon (AMZN) clearly had good results and upside to guidance but it also has Kindle, the perceived cool device that's become a must-have and a must-copy (by competitors). And its stock performance (table below) demonstrates the power of a momentum play.

The power of that multiplier may be even more evident with Apple, owner of the current king of cool devices, the iPhone. It certainly produced solid upside in the September quarter but the "in-line" outlook would have sent most stocks south. However, Apple investors "know" that the company always sandbags guidance so it's comfortable in the belief that December's results will be well ahead of management's public commentary.

Applied Materials represents the other end of the spectrum: huge upside in the October quarter and guidance well above what anyone had in print. But Applied Materials isn't a hot name with hot products. In fact, its semiconductor-related operations are improving but remain at depressed levels and the solar power business will struggle for the near-term. The strong upside just isn't enough to ignite interest in the stock.

What all this is attempting to highlight is that stocks move on more than fundamentals; there's a lot of "reading of tea leaves" that gets added to the process. You have to take that into consideration when you evaluate results this upcoming earnings season.

But keep in mind that every momentum stock runs out of gas at some point and your job is to stay on top of the "drivers" for signs of weakening. But the same may be true for some that can't seem to get out of their own way at present. They may catch a product or demand wave that creates a Mojo Multiplier for them as well. Finding those can be hugely rewarding.
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No positions in stocks mentioned.
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