Proof of a Pessimistic Market

by: Eddy Elfenbein

Tuesday was a good lesson on the benefits of diversity. Even though Johnson & Johnson (NYSE:JNJ) was weighed down by a poor earnings report and lower guidance, the rest of our Buy List picked up the slack and we slightly beat the market today.

We had two more earnings reports after the closing bell. Gilead (NASDAQ:GILD), which has been our big dud, posted disappointing earnings. For Q2, it earned 85 cents a share, which was two cents less than Street estimates. Boy this stock has a way of annoying me. Revenues rose 17% but again fell short of expectations.

Gilead’s earnings report three months ago wasn’t so bad but the market punished the shares anyway. They had lowered their sales estimates due to Obamacare, which wasn’t unexpected, but the stock dropped nearly 10% the next day, which was unexpected, at least by me. The shares have continued to fall.

To give you an idea of how pessimistic the market is, Wall Street currently expects full-year EPS of $3.61 (which isn’t totally crazy since we’re half-way done) and the stock is going for about nine times that. Did I mention that sales grew 17%? The stock was down after-hours but seems to have recovered some. I’m not giving in just yet—Gilead is a good buy.

The other earnings report came from Stryker (NYSE:SYK). I should mention that Stryker almost always reports in line or beats by a little. You never get big surprises from them which is why I like them. For Q2, they hit the Street’s consensus of 80 cents per share right on the nose. Revenue was a tiny bit below the Street but nothing to worry about.

The good news is that Stryker reaffirmed guidance for this year. They said that EPS for this year will range between $3.20 and $3.30. They already reaffirmed this guidance a few times this year so they must be serious. The Street currently expects $3.27 which sounds about right. Last year, they made $2.95 per share.

Stryker was down about 3.5% after-hours but I really don’t see anything in the earnings report that worries me. This is a solid company going for a decent, but not Gileadesque, price.