Alphabet & Beyond Meat Sink After Earnings

S&P 500 Finally Hits Record High

Monday was an amazing day for stocks. MSCI all country world index was up 0.6%. It’s now up 18.27% year to date. It is only down 2.17% from its record high in January 2018. It’s closing in on that high as investors anticipate a global cyclical recovery. A main news event Monday was that the S&P 500 increased 0.56% to a new record high finally. It is up 21.24% year to date. This rally supports what the bulls have been saying for a few months.

On the one hand, listening to the perma bears call for a recession this year was very wrong. On the other hand, it’s probably not time to spike the football. Stocks are getting overbought. CNN fear and greed index rose 5 points to 67 which is greed. It’s getting close to extreme greed. 

Our current situation is interesting. Latest earnings reports have been really good, but estimates are still for just 1.6% Q3 GDP growth. We have a weak, disappointing economy and a relatively solid earnings season. Thus, leading analysts to not take an ax to their Q4 earnings estimates.

Description Of Monday’s Rally

Nasdaq increased 1.01% ahead of Alphabet’s earnings in the evening and Facebook and Apple’s earnings later in the week. Russell 2000 rose 0.85% and the VIX increased 0.46 to 13.11. It’s interesting to see the VIX rise on an up day. It’s even more interesting when it’s a new record high for the S&P 500. Buying some protection when the market is getting close to extreme greed territory makes sense. To be clear, I’m just talking about the possibility of a 5% correction, not a bear market.

Worst 2 sectors were real estate and the utilities which fell 1.07% and 1.31%. Utilities have recently been declining because of the rise in rates. In the past 2 days, the sector is down 2.38%. As you can see from the chart above, the enterprise value to EBITA of the utilities sector is near 14X. It has gotten extremely expensive in the past few years. 

Obviously, utilities trade on rates, not earnings. When rates rise, this sector will be toast. If this sector declines, it would be good news for the overall market. It would imply investors are more optimistic about future growth. 2 best sectors were tech and communication services which rose 1.26% and 1.17%. Tech has been rising. Investors are getting more optimistic about the possibility of phase 1 of the China trade deal being agreed to.

Treasury Curve Steepens Further

The steepening of the curve isn’t bad news despite what the bears suggest. A rising 10 year yield implies investors are more optimistic about nominal growth. I can’t see how that implies a recession is coming. 10 year yield is up to 1.85% which is 42 basis points from its recent low. Investors been looking for it to break 2%.

As you can see from the chart below, the 10 year 3 month spread went from -50 basis points to 16 basis points very quickly. 2 year yield is at 1.65% ahead of the Fed’s rate cut this Wednesday. I think the Fed is about to pause its cuts for at least a few months. There hasn’t been much positive economic data yet, but clearly markets see a turnaround. That’s why the market stopped pricing in near term rate cuts, pushed the S&P 500 to a record high. Thus causing the 10 year yield to bottom.  

Alphabet Misses Earnings Estimates

As of Monday afternoon, 216 S&P 500 firms have reported Q3 earnings results. 77% have beaten estimates and 61% beat sales estimates. Sales growth is 3.21%. GAAP earnings growth is -15.39% and GAAP EPS growth is -7.47%. Non-GAAP earnings growth is -1.43% and non-GAAP EPS growth is 2.05%. This shows how bad it was for Alphabet to miss EPS estimates resoundingly. It was one of only 23% of firms to do so. And, it reported $10.12 in EPS which missed estimates for $12.42. 

Even with this big miss, it’s stock only fell 1.4% after hours. It beat sales estimates as revenues were $40.5 billion versus the consensus of $40.32 billion. Traffic costs were $7.49 billion which was $10 million higher than estimates. Finally cost per click was down 2% yearly.

Ad revenues were $33.92 billion which increased from $28.95 billion last year. Other revenues were up from $4.64 billion to $6.43 billion which beat estimates for $6.32 billion. This includes Pixel and cloud products. It will soon include Fitbit if the acquisition goes through. The other bets category, which includes the self driving car company Waymo, had $941 million in losses which increased from $727 million last year.

Beyond Meat Reports A Profit

Beyond Meat reported its first profit. This quarter may have been good for the company’s long term future, but its stock fell 10.2% after hours. That’s what happens when you have a very expensive stock. As of the close, it was down 55.13% from its record high. Look for it to get closer to its first closing price. It’s good for the balloon to pop so the company can focus on being a long term success.

The firm reported 6 cents in earnings which beat estimates for 3 cents. It also reported $92 million in revenues which beat estimates for $82.2 million. Net sales were up 250%. McDonald’s, Yum Brands’, KFC, and Subway are all testing Beyond Meat. Its main competition is Impossible Foods, but it will face more competition as the category grows. 

Long term success of the firm depends on how tasty competitors’ products are. I don’t see anyone being loyal to a particular company. The moat is in the technology. If you want to invest in Beyond Meat, heavily research the potential for competitors to make a tastier product. 

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