Negative earnings news is coming out daily on CNBC since we are in the middle of earnings season. I had a very negative impression when I first heard today’s earnings reports which included negative news from Kraft foods (KFT) considered a defensive company. Disney (DIS) also had negative earnings news with theme park attendance down and there was a negative earnings forewarning from Costco (COST). What I notice now in Wall Street Breakfast: Must-Know News at seekingalpha.com of the twenty four major companies that released earnings both before the market opened today and after yesterday’s market close ten of those companies reported negative quarterly earnings however twelve reported positive earnings news. Two companies reported neutrally which is basically positive news in today’s economy. A couple of the companies that reported positive earnings forewarned of lower earnings for the year.
Many companies forewarn to avoid excessive negativity when the actual earnings are released. The forewarning “prepares” investors for what awaits. Once the actual earnings announcement is made it doesn’t seem quite as bad to investors since they knew in advance. Uncertainty exists as to whether earnings will be as bad as the forewarning predicts but pessimistic projected earnings announcements influence the market in a negative way.
I find that the news announcements are frequently focused more on the negative news. For example I was left with a negative impression after hearing the announcements but the reality after further examination is that more companies announced favorably than negatively. Maybe some of the negative focus is because Disney Kraft and Costco are household names unlike Ilumina (ILMN) and ITT Industries (ITT) which had positive results. Negative news also seems to hit harder when we relate to the company involved. Who wants to see Disney’s earnings suffer when we hold such wonderful memories of their theme parks?
It is revealing that Kraft’s earnings were reduced due to currency fluctuations and pension expenses which were offset by better performance. While currency effect and pension expenses are certainly valid reasons for reduced earnings it is important to realize that people have not stopped buying cereal and cookies as may be the initial thought when thinking of Kraft’s earnings being reduced. Costco is definitely a higher end warehouse store. I shop there for food and staples but also for luxury items. Maybe the Calvin Klein jean Coach handbag and Ebel watch sales are slowing down but shoppers are still most likely buying food and necessities at Costco. While I am not denying that the luxury item sales are important to the bottom line the reduced sales may not be as bleak as one might imagine when they picture consumers discontinuing purchase of produce and bulk toilet paper.
Maybe I am the eternal optimist. I hope this is true as optimism is definitely healthier than pessimism as long as it is not outright denial of reality. I do however think the media tends to be more biased toward the negative in general and it is our job as investors to look for pockets of optimism as therein lay eventual opportunity.
Investing jargon explained:
Earnings season is the time when the majority of companies report their earnings from the previous quarter or year. This creates volatility in the stock market especially in the companies and sectors reporting. It is also an indicator of how the economy is doing which drives the direction of the stock market.
Neutral earnings occur when the company reports earnings that were as expected by analysts.
Defensive companies such as Kraft sell items that are needed regardless of the economy such as food and pharmaceuticals.