Investors Await Earnings Disappointments
It happens every quarter at about this time: Underperforming U.S. companies announce their expected shortfalls. If the past holds, investors can expect stocks to be particularly volatile in the days ahead.
While analysts don’t foresee an excessive tally of disappointments this time around, all it takes is one high-profile company to send stocks reeling.
Already, Advanced Micro Devices Inc., Boston Scientific Corp. and Tupperware Corp. have issued warnings for the third quarter.
“While managements are working harder to discover these shortfalls and prevent them, we will see a few disappointments announced,” said Fred Taylor, chief investment officer at U.S. Trust Co., which oversees about $58 billion.
In some cases, he said, companies have toned down expectations because “they see what happens to other stocks when they report (a shortfall) and recognize what could happen to them.”
Investors’ reactions can be extreme. Friday, Boston Scientific tumbled $12.37-1/2 to $63.50. On June 10 of last quarter, Xylan Corp.’s shares fell 17 percent after the company said its second-quarter earnings and sales would lag the first quarter’s because shipments of networking equipment were lower than expected. Five days earlier, retailer Circuit City Stores Inc. fell 5.6 percent after predicting a shortfall.
While prices could slip in the days ahead, they probably won’t fall too far, analysts said. That’s because a favorable economic environment under-pins the market: Inflation is low, stable interest rates enable companies to manage their borrowing costs and money continues to flow into stock mutual funds.
Reports next week are expected to show producer prices and retail sales climbed in August, developments which could boost some investors’ claims that the economy is on the verge of generating inflation. Still, consumer prices rose at a 1.5 percent annual rate in the first seven months of the year, the slowest pace since 1986.
“The macro environment remains very favorable,” said Elizabeth Bramwell, president of Bramwell Capital Management Inc. in New York, which oversees about $500 million. “Low interest rates and inflation enable companies to run smoothly, and that’s always something to be optimistic about.”
Investors were optimistic about U.S. stocks this week, fueling a rebound from the previous week. The Dow Jones Industrial Average rose 199.99 points, or 2.6 percent, to 7,822.41. The advance gained back three-quarters of last week’s 265-point slide.
Among broader market indexes, the Standard & Poor’s 500 rose 29.58, or 3.3 percent, to 929.05. The index, up 25 percent this year, recorded an all-time high of 960.32 on Aug. 6.
The Nasdaq Composite Index rose 48.45, or 3.1 percent, to 1635.77, its first record since Aug. 6. The Russell 200 Index of smaller companies rose 9.61, or 2.3 percent, to 433.04, its seventh straight record.
Bramwell said the stock market’s rally - the Dow industrials are up 53 percent since the end of 1995 - has created wealth that should result in increased consumer spending. As a result, she’s optimistic about the prospects for retailers and real estate companies.
“The stock market is a positive and a psychological plus” for consumers, Bramwell said. “Home furnishings will benefit as discretionary income climbs. So will commercial real estate.”
Among her top picks are retailers Wal-Mart Stores Inc., Tiffany & Co. and Home Depot Inc., and LaSalle Partners Inc., a Chicago-based full-service real estate firm which went public on July 16.
All this eagerness among consumers could have its downside. When consumers increase spending, shortages of goods can occur and prices rise. The Federal Reserve’s interest rate policy arm meets next on Sept. 30 to decide whether it should raise the rate on overnight bank loans. It last did so on March 25, boosting it to 5.50 percent from 5.25 percent.
Stanley Nabi, vice chairman of the investment policy committee at Wood Struthers & Winthrop, which oversees about $8 billion, said the central bank will eventually raise the rate on overnight bank loans.
“You cannot ignore the fact that the economy is fairly strong - it’s stronger than the Fed anticipated two months ago,” said Nabi.
“The Fed has no choice but to act.”
That said, the money manager has been able to find some attractive stocks. Among them is IBP Inc., the world’s largest processor of fresh beef and pork. The Dakota City, Neb.-based company’s stock has a price-to-earnings ratio of 13.58, using an estimate for 1997 earnings of $1.68 a share.
Right now, companies in the S&P 500 carry an average P/E of 20.23 using estimated 1997 earnings.
U.S. stocks could get a boost in the days ahead as some international investors move funds from Asia to the U.S., money managers said. An estimated $530 million was withdrawn from international equities funds in the week ended Tuesday as currency and equities markets in Southeast Asia tumbled and interest rates in the region rose, according to Trim Tabs Financial Services Inc.
“The whole world is not in sync in terms of a boom,” said U.S. Trust’s Taylor. “You have a recovery in Japan, but a mixed performance in Europe.”
If a string of U.S. companies disappoint expectations in the days ahead, investors may be happy just to notch modest gains.