10 Shocking Earnings Season Trends (Part II)

by: Lou Basenese

In yesterday's column, I shared the startlingly low expectations analysts had for first-quarter earnings. And, of course, their predictions were rendered totally irrelevant. For the second consecutive quarter, S&P 500 companies are on pace to grow earnings by about two percentage points more than analysts originally expected. While their ineptitude may not be all that surprising, here are five more earnings season trends that might be…

Again, take note and invest accordingly.

~Surprise #6: Europe's Woes Aren't Sabotaging Revenue "Beat Rates"

Yesterday, I focused on the mildly bullish earnings "beat rate." Today, it's time to turn our attention to the revenue beat rate (i.e. - the percentage of companies topping analysts' expectations for sales). To put it bluntly, it started off in the tank at a mere 43%. Truth be told, we haven't witnessed such a terrible reading since the height of the financial crisis. Thankfully, though, we've made (significant) progress. The current revenue beat rate stands at 52%, according to Bespoke Investment Group.

While that's still below the bull market average of 60%, it's not terrible. Especially when you consider that companies aren't suffering massive sales declines. Instead, S&P 500 sales are off a mere 0.1%, on average. So much for "European exposure" sabotaging sales, as one Wall Street analyst boldly warned…

~Surprise #7: Underpromise Now… Overdeliver in the Second Half

Out of the 80 S&P 500 companies that provided guidance, 63 lowered expectations. That works out to 79%, which is well above the average of 61% over the last five years, according to FactSet. Wall Street is wise to management's ruse of underpromising and overdelivering, though. That's why nobody's rushing to lower earnings estimates for the next quarter. In fact, second-quarter earnings revisions for the S&P 500 remain in line with historical averages. They dropped 2.5% compared to the five-year average quarterly revision of -2.8%.

So don't sweat the seemingly negative guidance. Earnings growth for S&P 500 companies remains on track to accelerate in the second half of the year. And since stock prices ultimately follow earnings, that bodes well for the longevity of this bull market.

~Surprise #8: No Fatigue Yet

At this stage of the bull market, you'd expect stock prices to exhibit a muted response to earnings - given that they've risen so much already. Think again! Based on Bespoke's calculations, the average one-day gain for stocks after reporting earnings checks in at 0.77%. That's sky-high compared to the 10-year average of 0.12%.

~Surprise #9: Time to Hang Up on Telecom?

In terms of valuation, the S&P 500 is trading in line with historical averages. The current forward P/E ratio for the Index rests at 14, compared to the 10-year average of 14.1. So, on average, we're paying a fair price for stocks.

If we break down the valuations by sector, though, be wary of telecom stocks, including Windstream Corporation (NASDAQ:WIN). The sector boasts the highest forward P/E ratio of 18. Depending on whether or not you own any telecom stocks, it's either time to hang up on them - or put them on your "Do Not Call" list.

~Surprise #10: Energy is (Still) Getting Cheaper

If you're on the hunt for bargains, look no further than the energy sector. It's the only one that experienced a decline in valuations over the last quarter. The current forward P/E ratio checks in at a mere 11.9. Now, I'll be the first to concede that a cheap valuation doesn't guarantee future profits. But it certainly reduces our risk.

There's actually one corner of the energy market that I'm convinced is poised for a resurgence. So much so, that I'm getting ready to recommend that our subscribers push some chips in on it. Fair warning: It's perhaps the most contrarian recommendation I've made all year. But that's why the profit potential is so high.