Earnings Help Wall Street Bounce Back

Who would have ever guessed U.S. stock markets would have such a strong week? When you look at the potential problems popping up on a daily basis, from Ebola to ISIS, Europe, China, oil prices, and now, school shootings, well, a six percent gain in the last ten days seems more than anyone could have hoped for. The last five days were loaded with a heavy dose of earnings from the heavyweights of the corporate world- Apple Inc (NASDAQ:AAPL), McDonald's Corporation (NYSE:MCD), International Business Machines (NYSE:IBM), Boeing Company (NYSE:BA), Coca-Cola Bottling Co Consolidated (NASDAQ:COKE), Yahoo! Inc (NASDAQ:YHOO), and Caterpillar Inc (NYSE:CAT) (there were plenty of others as well). You really have to go through each report on a case by case basis to evaluate the merit of each result.

Investors did not like what McDonald's, Coke, and IBM had to say because these huge icon's are continuing to have problems generating any kind of growth. Just as important is the poor positioning of their core businesses and failure to address the problem areas. In McDonald's case it is the perception of low quality food and a public increasingly moving towards healthier choices. Coke has been plagued with a decade of declining carbonated beverage sales in North America. IBM is very much tied to computer mainframes and a software and services business which is considered mediocre. Consequently, the investment world has the idea these behemoths might now be vulnerable to an activist who can bring badly needed change. These are enormously successful companies which still have incredibly profitable businesses. For example, in three months, McDonald's still brought in $1 billion in net income. Yes, there are issues, big issues, which each management team is going to have to address. Competition is fierce in each of their areas, and getting tougher by the day. Still, they all have continually evolved over the last 30 years and always responded by eventually becoming the best company in their respective industry. It would be a mistake to underestimate any of them.

The other side of the coin are those which actually impressed Wall Street and you have to begin with Apple. The company sold 39 million new phones and totaled over 50 million units if you add in computers and I-pads. They reaped over eight billion in profit and investors have continued to buy the stock based on these results and future product introductions. Another tech giant which got a favorable response was Yahoo, which showed a little growth (can you believe it?). In fact, Marissa Meyer has slowly been changing where their revenue is coming from, with native ads on mobile devices and video accounting for an increasingly higher percentage of revenues. They are still a work on progress, and much attention continues to be paid to the tax efficiency of how they will handle their sixteen percent position in Alibaba.

Get The News You Want

Read market moving news with a personalized feed of stocks you care about.

Get The App

The most surprising, and without question the one which made the most impact, was from Caterpillar. They typically tell the world how bad global business is and guide down for the next quarter, but instead they blew away the numbers. The night before, China posted a better than expected GDP growth figure of 7.3%, so the market decided maybe deflation is not in the cards after all.

As always, earnings season brings plenty of attention to those companies which absolutely get destroyed when their results don't meet expectations. The most blood was shed in the technology area where Amazon.com Inc (NASDAQ:AMZN) and Yelp Inc (NYSE:YELP) got taken to the woodshed in a big way. Interestingly enough, even after the thrashing, these companies still trade at monster multiples. If you are a buyer, which I am sure is a big if, be very,very careful. Purchasing at 200,000 times earnings makes anything very difficult to make money at, no matter how great the company is.

Another group which got beat up pretty good was Lumber Liquidators Holdings Inc (NYSE:LL), which was tied to weakness in housing. It is very disappointing to watch something you own lose so much value in such a short period of time. It is the nature of investing because it happens to everyone. This week, it happened to Warren Buffett as IBM and Coke proceeded to lose him over a billion dollars during the day of their respective report. Tough stuff this investing profession, wouldn't you say?

Next week brings a heavy dose of corporate financial reporting as well. Two of the biggest industries on the planet, pharmaceuticals and big oil will be telling all. I expect the oil patch will show slightly lower profits due to lower realizations on the upstream component, while the downstream portion will be helped by reduced feedstock costs. We can also look forward to the FOMC meeting on Wednesday when it is expected the world will discover there will be an end to quantitative easing. I know you were worried about it ending as well.

Disclosure: Y H & C Investments, Yale Bock, and the family of Yale Bock own positions in securities mentioned in the blog post. Investing in stocks can lead to the complete loss of your capital. As always, on any company mentioned here, past performance is not a guarantee of future returns. Investing involves risk of losses on invested capital. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charter holder.

Written By: Yale Bock