AAPL: Measuring Up to Expectations
Quarterly Earnings: Potholes and Catapults
Cabot Investors Conference: One Good Idea
If you’re a dedicated stock investor, you are undoubtedly aware when the stocks in your portfolio and on your watch list are reporting their quarterly and annual results.
Or, maybe it would be more accurate to say that you know that, in theory, you ought to be aware of such important events.
After all, quarterly earnings reports are the four predictable Moments of Truth in a stock’s year. And everyone knows that how well a company’s results measure up to expectations will likely set the course for the next few months.
I know you’re probably sick of hearing about Apple (AAPL), but consider this. Last July, AAPL was trading at 600 when the company reported its fiscal Q3 results, which showed $35 billion in revenue and earnings of $9.32 per share, which translates to $8.8 billion in profit.
By any rational measure, this was a great quarter, but analysts had been predicting revenue of $37.5 billion and earnings of $10.37 per share. So Apple’s string of exceeding analysts’ expectations was broken and professionals began to talk about Apple losing its sheen. Meanwhile, the stock headed for 700, which it topped in September.
When Apple’s fiscal Q4 results came out on October 25, AAPL was trading at 616, and the company’s $36 billion in revenue and $8.67 per share in earnings ($8.2 billion) would have made any other company the market’s darling. Unfortunately, analysts had $8.81 in earnings in mind, so the big tumble in AAPL’s price picked up speed.
I won’t bore you with the results from the company’s quarter that ended in December, but suffice it to say that they once again failed to come up to scratch in the eyes of analysts, and the stock continued its droop toward 400.
This is just a quick review to remind you of how important quarterly reports are. If you miss the expected number, even if you report 18% revenue growth (to $54.5 billion) and earn $13.81 per share, and pay a quarterly dividend of $2.65 and have cash reserves of over $137 billion, you will be thrown off the end of the dock in concrete galoshes. You will wind up 38% off your highs and trade at a P/E of just 10.
So much for Apple, the extreme dire example of how missing analysts’ expectations can take a stock off at the knees.
Today, I’m offering you a front-row seat at a much, much smaller spectacle.
Tonight, after the market closes, two companies whose stocks are in the portfolio of the Cabot China & Emerging Markets Report will be reporting their Q4 results. The companies are Qihoo 360 (QIHU) and Seaspan (SSW). Qihoo 360 is a Chinese company that makes security software for mobile devices and operates a popular mobile website that made headlines last summer by grabbing 10% of Chinese mobile search traffic. QIHU has been rallying for five days, nearing its post-IPO peak of 36.2 from April 2011.
The all-important consensus numbers for QIHU are $93.68 million in estimates for quarterly revenue and 17 cents per share in earnings. That’s the bar that investors expect Qihoo 360’s results to jump over.
At Cabot, we always say that what’s important isn’t so much the numbers in a quarterly report as it is the reaction to those numbers. And that reaction will be quite evident tomorrow.
Seaspan, the other company releasing results tonight, is a containership specialist whose 72 containerships (and three new ships scheduled for completion in 2014) are all under long-term contract to shipping firms. Seaspan’s consistent, transparent revenue stream makes it a favorite of slightly more conservative investors who appreciate its substantial 5.2% annual dividend yield and its price stability. Analysts are expecting Seaspan to hit $167.7 million in revenue and 28 cents per share in earnings.
Anyhow, both companies are going to be reporting tonight, and I’m inviting you to take a look at the headlines tomorrow to see how things turned out. If investors are pleased with the results, that will show up in the stocks’ charts. And if they are disappointed, that will show up, too.
And for me, the results will leave me with possible changes to make to the portfolio that I advise.
But always remember, it’s the reaction that’s the most important thing, not the numbers themselves.
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Carlton Lutts, the man who founded Cabot more than 42 years ago, loved growth investing. He was an enthusiastic, optimistic man, and he brought an engineer’s training to the job, inventing and testing lots of systems for analyzing markets and stocks, discarding what didn’t work and finding ways to build what did into a workable system.
One source for Carlton’s ideas was his voracious reading of books by self-proclaimed experts. Cabot is located in a building that was once a branch library of the Salem Public Library system, and we still have yards and yards of nice, built-in bookshelves that are stocked with his accumulated investing volumes. (You can see a small part of the collection in the background of my editor picture on the Cabot website.)
Carlton used to say that all he needed to get out of a book to make it worthwhile reading was one good idea. And that’s a pretty powerful idea all on its own.
Just think about how your golf game might be if you got one powerful idea for improvement from reading a book or taking a lesson. And the same goes for just about any activity, from playing bridge to exercising to eating well. If you’re in the market for improvement, one really good idea can be worth its weight in gold.
As the Buddhists say, “When the pupil is ready, the teacher will appear.”
If you’re a stock investor, and you’re thinking of attending the Cabot Investors Conference in Salem next August, it would be more accurate to say that eight teachers will appear. That’s the eight editors of Cabot newsletters, from Mike Cintolo, editor of Cabot Market Letter and Cabot Top Ten Trader to Tim Lutts, editor of Cabot Stock of the Month, Roy Ward, editor of Cabot Ben Graham Value Letter, Thomas Garrity, editor of Cabot Small-Cap Confidential, Robin Carpenter, editor of Cabot ETF Investing System, Jacob Mintz, editor of Cabot Options Trader, Chloe Lutts, editor of Dick Davis Dividend Digest and Dick Davis Investment Digest, and … oh yeah, me, Paul Goodwin, editor of Cabot China & Emerging Markets Report and Cabot Wealth Advisory.
I can promise you that the Cabot Investors Conference will be brimming with ideas, and that one of them is bound to be just what you need to become a better, richer investor. You’ll also have a chance to buttonhole your favorite Cabot editor and ask, in person, the questions that you’ve been meaning to email to us.
And personally, as the Master of Ceremonies of the Conference, I can promise you some of the funniest jokes you’ve ever heard at an investment conference. If the pursuit of one good idea interests you, you can click on the link here for more details.
My stock pick today is whichever of the stocks that are reporting today is favored by investors tomorrow. If QIHU’s chart shows increased buying on good volume, that’s the one to buy, because a good earnings result can charge a stock’s batteries for a much longer ride.
And if SSW’s results are received with enthusiasm, that’s the one to choose.
And, of course, if both do well, you will have to make the decision yourself.
And finally, as you have probably noticed, if either or both of them miss their marks, you should just look elsewhere.