A Tale Of 2 Markets

Includes: BBBY, CAT, FDX, WSM
by: Bret Jensen

Investors should be paying close attention to earnings reports and company guidance. They are pointing to a very bifurcated market. On one hand, any company that gets a good portion of its revenues overseas is disappointing investors right now. Two good examples of this are the reports yesterday from Federal Express (NYSE:FDX) and Caterpillar (NYSE:CAT).

Federal Express - The company reported earnings that after adjustments came in 15 cents a share less than expected. Federal Express's CEO stated the quarter was "very challenging" due to weakness in the global air freight business. It is also announced it was cutting some air cargo flights to Asia. The stock fell some $7 as a result. The shares still sell at some 16x this fiscal year's projected earnings and revenue growth will probably be around 5% for the near future so I would continue to avoid the shares until they get under $90 a share.

Caterpillar - The huge machinery manufacturer said its global retail machine sales fell 13% during a three-month period ended in February including a huge 26% drop in Asia-Pacific sales from the prior year. The stock fell 1.5% yesterday as result of the update even in an up market. The shares are cheap here at 10X trailing earnings. However, CAT just fell through its 200 day moving average. I would wait to buy or add to positions until it behaves better technically and/or improvement in international sales is evident.

European PMI figures came out today under expectations, even in Germany. It is obvious the situation in Europe is getting worse even as the continent works through its latest flare up (Cyprus). Continue to avoid companies who get a large portion of sales from Europe.

On the flip side to all this is companies that get all their revenues from North America. Williams Sonoma (NYSE:WSM) is a good example of a stock in this category. The company reported earnings yesterday that blew away estimates. The company beat earnings estimates by 12 cents a share, beat on revenues by approximately $10mm and threw in a dividend hike for good measure. The shares jumped more than 10% Wednesday as a result. The stock is a backdoor housing play as recovery in the housing market is significant tailwind for its West Elm, Pottery Barn and core Williams Sonoma stores. After yesterday's huge rally, I would probably wait for a pull back to buy shares here as the shares are little pricey currently at about 20x this year's expected earnings.

Another back door housing play here is Bed Bath & Beyond (NASDAQ:BBBY). The company next reports earnings on April 13th and the stock has behaved much better recently. The shares are cheap at 12.5x forward earnings and the stock has other catalysts to recommend it, which I profiled the other day.

Investors should continue to monitor companies' reports and weight their allocations towards North American firms until the world economy shows that a recovery is in progress.

Be careful out there and happy hunting.

Disclosure: I am long CAT, BBBY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.