Bad Earnings Reports Cause Individual Stock Crashes After Hours

Bad Earnings Reports - Mixed Wednesday Action

The market was mostly flat on Wednesday. S&P 500 fell 5 basis points, the Nasdaq rose 7 basis points, and the Russell 2000 was up 0.23%.

Biggest action was in the after hours session as many tech stocks fell. During the normal trading session, the worst 2 sectors were real estate and healthcare. They fell 0.39% and 0.49%. Best 2 sectors were the financials and energy which rose 0.39% and 0.36%.

Oil prices were up 2.6% to $56.94. Saudis ignored President Trump’s tweet on Tuesday where he asked OPEC to take it easy.

The Saudi Energy minister stated, "We are taking it easy. The 25 countries are taking a very slow and measured approach. Just as the second half of last year proved, we are interested in market stability first and foremost."

Bad Earnings Reports - Small Caps Are Very Overbought

Russell 2000 outperforming the S&P 500 Wednesday was nothing new. Small cap index is up 17.24% year to date.

If you think the S&P 500 is as overbought as an index can get, you haven’t seen the Russell 2000.

As you can see from the chart below, the rolling 40 day percentage change of the Russell 2000 is in the 99th percentile. This usually occurs after major lows. That’s obviously great news for stocks. A major low implies another bear market isn’t coming soon.

Usually, small caps consolidate in the near term after this level is reached. But the over next 6+ months forward returns are better than average. The small caps might not follow the medium term average if the economic cycle rolls over. Usually, there are major bottoms when a recession is ending or a slowdown is ending. The economy never went into a recession and the slowdown isn’t over yet.  

Bad Earnings Reports - Tragic After Hours Action

As of Wednesday evening, 472 S&P 500 firms have reported their Q4 earnings results.

68% of firms beat their EPS estimates with an average growth rate of 13.5%. 61% beat their sales estimates with an average growth rate of 6.1%. 12 firms are reporting on Thursday.

The results after hours on Wednesday were terrible. Box stock fell 24%; Fitbit stock fell 14.41%. Booking Holdings stock fell 9.23%; Square stock fell 6.38%. HP stock fell 12.16%, and L Brands stock fell 6.9%.

L Brands had $4.85 billion in revenue which missed estimates for $4.88 billion.

The firm’s 2019 EPS guidance was for $2.20 to $2.60, sharply missing estimates for $2.71. HP had its lowest revenue growth in 2 years as it was 1.3%. Revenues were $14.71 billion which missed estimates for $14.86 billion.

EPS met estimates at 52 cents. Booking Holdings had revenues of $3.21 billion which missed estimates by $10 million. EPS was $22.49 which beat estimates for $19.42. Box had revenues of $163.7 million and EPS of 6 cents. EPS beat estimates by 4 cents, and revenues missed by $500,000.

Fitbit gave weak Q1 revenue guidance which was between $250 million and $268 million which missed estimates for $272 million. The stock fell despite Q4 revenues coming in at $571 million which beat estimates by $2 million.

Square’s EPS was 14 cents which beat estimates by a penny. Revenues were $464 million which beat estimates by $10 million.

Bad Earnings Reports - As you can see from the chart below, year over year revenue growth was 51.5%.

Operating margins increased to -0.3%. Subscription based revenue was up 144%. The firm’s Cash app has more than 15 million monthly active users. It has a strong network effect which is causing this explosive growth. Q1 EPS guidance was weak, with the mid-point at 7 cents which was 4 cents below estimates.

Revenue guidance was in line with estimates as it was between $472 million and $482 million.  

Bad Earnings Reports - Most of these firms reported revenue misses and some reported weak guidance.

That’s a bad sign for the tech sector. This group was a mixture of various types companies as some like Fitbit are perennial money losers, some are old-line low growth firms like HP, and some are high flying winners like Square. I think one of the reasons they all fell is because they have been flying too high. Square, which has the best fundamentals, was up 56.4% since its Christmas Eve bottom.

Bad Earnings Reports - Weakest Housing Starts In 12 Years

I already reviewed the housing starts report, but I must contextualize how bad the result was. It missed estimates by the most in 12 years. The table below shows the largest misses. The question is if this miss is like the ones in the past few years or the ones during the lead up to the housing bubble and after it burst. It’s numerically closer to the 2004 miss than the 2018 miss, but I expect housing to rebound modestly this year because of the decline in rates.

When housing is weak, the economy usually follows. Residential investment weakness has catalyzed 8 of the past 10 recessions. Real residential investment growth should be negative in Q4 if the Atlanta Fed GDP Nowcast’s estimate is correct. The good news is the chart below shows home mortgage impulse growth is still positive.

Bad Earnings Reports - Weak price growth in December and strong real wage growth should help home buyers in 2019.

The 20 city non-seasonally adjusted Case Shiller Home Price Index growth was 4.2% year over year . That's the weakest growth since September 2012.

It missed estimates for 4.8%. It fell from 4.6% in November. Monthly non-seasonally adjusted growth was -0.2% and seasonally adjusted growth was 0.2%. Both missed estimates by 0.2%.

San Francisco prices have fallen 3 straight months. San Diego prices fell. Los Angeles and Seattle’s prices were flat. Las Vegas and NYC did well. Year over year price growth was 11.4% in Las Vegas, 8% in Phoenix, and 2.9% in Chicago (the lowest growth rate).  

The FHFA price index was also weak as it was up 0.3% monthly which missed estimates by 0.1%. It was up 5.6% yearly which was down from 5.9% and the lowest growth rate in 3 years. Monthly price growth was 0.5% in the Pacific and 0.6% in the Mountain region. Yearly price growth was 7.7% in the Mountain region, 6.3% in the South Atlantic, and 4% in the West South Central region.  

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