What The Market Wants: Earnings Reports Off To Inauspicious Start

The beginning of Q2 earnings season got off to an inauspicious start with Alcoa (AA) barely beating highly reduced estimates by a single penny per share. Alcoa’s CEO provided cautionary but optimistic guidance on CNBC after the market closed. AA’s shares initially climbed a bit in the aftermarket but have since given most of that back.

Despite a plethora of positive economic news topped by last week’s robust employment report, analysts are hoping for, if not better earnings, at least positive guidance from the companies as their CEOs parade to the speaker’s stand over the coming weeks. The specter of a QE3 slowdown foreshadowed by Chairman Bernanke has spooked the bond markets, resulting in substantial outflows from bond and money markets funds, as well as similarly structured ETFs. As a result, investors have put some of those funds to use in the equity markets, generating a 3 - 5% gain in the major domestic indices.

The S&P 500 was unable to break through resistance at the 1645 level, its last resistance level before challenging its historic high of about 1690 in late May. Whether or not that will happen depends on next week’s earnings reports and, even more importantly, the forward guidance. The fuel is there (monies from the bond market), but it needs to be lit by some enthusiasm and better revenues from this quarter’s reports.

Not much else on the table this week from economic data. Today, we easily beat estimates on consumer credit. Wednesday we get wholesale inventories, which are expected to be up a tad. Export and import price are unlikely to create much of stir on Thursday; neither are initial jobless claims. Friday we get the producers price index (PPI) and the initial look at Michigan consumer sentiment for July. But investors will be focused primarily on the numerous earning reports coming out each day. We would suggest paying more attention to the guidance than the earnings figures.

Last week, small-cap growth won the style/cap battle for the week, the month, the three months, and the six months. It was up a robust 3.51% on the week. Positive sectors include Healthcare, Financials, and Consumer Cyclicals, along with Technology stocks that are starting to warm up to some handsome dividend surprises. Large-cap stocks brought up the rear again, as they have many more issues with global slowing (and warming).

Egypt is now on the hot seat along with just about everybody else, although Europe continues to show signs of working through its financial woes. Hopefully, our Congress is having a nice summer and preparing to come back to Washington in the fall to get some real work done. We should be so fortunate! Surely, they will realize that if they don’t get down to business, heads will start rolling.

On a more positive note, we scoured the database for some small-cap ideas and found four good growth stocks with dividends as well. That is likely where a lot of the bond money will go: Chasing corporate dividends.

4 Stock Ideas for this Market

Big 5 Sporting Goods Corporation (BGFV)
• Consumer Cyclicals Sector, Specialty Retailers Industry
• Sporting goods retailer in western United States
• Forward P/E ratio: 14.45
• Beat earnings estimates every quarter for past four, by 5.6% to 61.9%
• Lots of upward analysts’ revisions
• Expected earnings growth current quarter: 116.7%
• Expected earnings growth this year: 87.0%
• Expected earnings growth per next for next 5 years: 15.65%
• Dividend yield: 1.9%
• Price on 7/8: $21.38

Dynex Capital, Inc. (DX)
• Financial Sector, REIT – Residential Industry
• A leader in mortgage REITs
• Good time to buy strong dividend play on a pullback
• Dividend yield: 11.4%
• Price on 7/8: $9.75

Mid-Con Energy Partners, LP (MCEP)
• Energy Sector, Oil & Gas Industry
• Buy on pullback to get nice dividend and good growth for at least next two years
• Forward P/E ratio: 9.27
• Expected earnings growth current quarter: 33.3%
• Expected earnings growth next quarter: 57.1%
• Expected earnings growth this year: 28.5%
• Expected earnings growth next year: 16.3%
• Dividend yield: 9.1%
• Price on 7/8: $21.87

Maiden Holdings, Ltd. (MHLD)
• Finance Sector, Insurance Industry
• Bermuda-based holding company providing reinsurance solutions
• Forward P/E ratio: 7.87
• Expected earnings growth next quarter: 11.10%
• Expected earnings growth this year: 77.3%
• Expected earnings growth next year: 26.5%
• Dividend yield: 3.1%
• Price on 7/8: $11.65

Full disclosure: The author does not hold positions in any of the stocks mentioned in this article.

Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.