4 Stocks That Drove The Market Lower And Will Lead It Higher

Includes: CAT, CVX, MMM, UTX
by: Brian Nichols

It's amazing how fast the market can change in this economy, with the last two days posting a loss of nearly 700 points on the Dow Jones (NYSEARCA:DIA). Just last week analysts and investors were feeling optimistic as the markets posted large gains, only to fall over the last two days with investors now fearing a recession. This schizophrenic mindset where we are hot, then we are cold, has led to extreme volatility that is near impossible to predict. I have provided my opinions regarding the economy and its future direction. I have placed an emphasis on what's led us to this point along with earnings and the Dow Jones' most influential stocks during the last few days.

Investors are very direct regarding their opinions of our economy's future. People either believe the loss is based on panic or they believe we are headed toward another recession. My beliefs are a mixture of both as I see legitimate economic issues but I also see companies that are performing exceptionally well in terms of fundamentals, but are still dropping. The situation is complex with various opinions that are neither right or wrong, yet I feel compelled to try to make sense of the madness.

The Dow Jones lost 674.83 points during the last 2 days as investors prepare for another recession. Anyone who has watched the news during the last few days has heard the Fed's comments regarding the economy. The Fed stated that "there are significant downside risks to the economic outlook, including strains in global financial markets." Many believe this statement on Wednesday afternoon is responsible for a large portion of the market's loss. I was surprised by the market's reaction, since nothing was said that we have not heard before, in fact, economists have been saying this for the last 6 months. Yet when Ben Bernanke or another representative of the Fed makes such a discouraging statement the market loses 6.5% of its value.

Weak global data and Moody's downgrade of 3 large banks also contributed to the loss, posted over the last 2 days. But based on what I have observed the strong market reaction was a result of the Fed's comment and the $400 billion plan to shift short and long term bonds. During the last 2 days nearly every component of the Dow Jones posted a significant loss in value, with four contributing an unbelievable amount of loss. Below is a chart of four stocks and their impact on the Dow Jones' loss in value over the last 2 days.

Biggest Losers
Company Ticker Stock Performance Dow Impact
Caterpillar Inc CAT (10.9%) 71.98
Chevron Corporation CVX (7.93%) 54.80
United Technologies Corporation UTX (8.76%) 47.15
3M Company MMM (8.16%) 45.36

These 4 stocks accounted for 219.29 points of the 674.83 points of Dow Jones loss, or nearly 33% of the total loss. And while each of these stocks account for a significant portion of the Dow Jones I still find this number to be surprising. I have looked over each stock and I have been unable to find any reason that would validate a loss of this magnitude. These 4 companies combined lost nearly $33 billion of value over the last 2 days, as a result of the Fed using the word "significant." It doesn't make sense so therefore I will look at recent news surrounding these companies to better understand why they may have fallen so hard.

Several indicators have been lower than expected, which may provide reason behind CAT's near 34% loss over the last 2 months. Yet the U.S. architecture billings index rebounded in August, after 4 months of decline. This shows a demand for this particular area within the industrial industry, an area CAT directly affects. In addition, CAT recently announced that dealer sales rose 30% for the 3 months ending in August, a slight increase from its previous period earlier this year. Construction in the U.S. may not be at its highest levels but CAT has focused on emerging markets and has significantly increased sales and income year-over-year.

Several of the large oil companies have lost value over the last 2 days but none more than Chevron in terms of value. Most believe the loss is directly related to the price of oil, which dropped near $80 today. The price of oil is connected to an oil company's revenue and income, and since the price has dropped from over $100 to near $80, in such short time, most believe earnings will be affected. This scenario is very likely, however, oil demand is expected to hit a record for this year. Despite reports that demand has weakened in China it's still rising in emerging markets and Asia. In addition to the prices of oil, some have speculated that Chevron may be interested in acquiring the assets of Range Resources, which would give the company a large supply of natural gas.

With the exception of 3M announcing that Petrifilm has received PTM validation, and an increased yield, the company has had no news of any relevance over the last two days. However, the stock does trade in the Construction Supplies and Fixtures industry, which has underperformed the S&P 500 (NYSEARCA:SPY) by nearly 4%. MMM has been one of the largest contributors to the loss despite solid earnings and bright guidance for the future.

United Technologies' big loss all came on Thursday when the company announced it was purchasing Goodrich Corporation for $16.5 billion. I believe this is great news that will produce many years of long-term success. Customers can now get everything built at United Technologies, versus contracting 2 or 3 companies to build one plane. The company will now have a maker of aircraft landing gear and jet-turbine casings to compliment its services, therefore the company should capitalize on the demand for commercial planes. Yet, I do not believe it was the purchase that caused investors to sell the stock but rather the suspension of share repurchases. The company said it will suspend repurchases in 2012 and reduce as much as 50% in 2013 and 2014. This looks bad to investors, in an economy that trades on the moment and does not appear to look at the future.

With the exception of Chevron I see very little that validates these large amounts of loss. And of course there were other stocks such as IBM that contributed 29.74 points to the Dow Jones loss, but none to the extreme of these 4 companies. I believe this trend is likely to continue over the next few weeks, which could send these stocks, and others, down even lower. However, I challenge the reasons behind my assumed future losses in the market, during the coming weeks. When I look at the market as a whole I see problems in Europe, a slowing economy in China, a drop in manufacturing, high unemployment, lagging real estate, slow growing GDP, disconnected politicians, sovereign debt, tons of lawsuits, and record low consumer sentiment. These indicators, opinions, and outlooks are likely to remain intact until the economy gives us a reason that creates optimism.

I am looking forward to the upcoming earning season, which will kick into full gear during October. Because despite outlooks and indicators the market is a collection of individual companies, that I feel, are significantly undervalued in comparison with previous fundamental performance. There have been few companies to report earnings during the last month, but a few that stick out to me are General Mills (NYSE:GIS), Oracle (NYSE:ORCL), Nike (NYSE:NKE), Discover Financial Services (NYSE:DFS), Bed Bath & Beyond (NASDAQ:BBBY), Walmart (NYSE:WMT), and Research in Motion (RIMM). These companies are among the largest of those that have announced earnings, and given outlooks, during the last couple weeks.

  • General Mills (GIS) has a market cap of $25.42 billion and operates in the food processing industry. It announced better than expected earnings and reaffirmed FY2012 guidance.
  • Oracle (ORCL) has a market cap of $143.36 billion and operates in the software and programming industry. The company announced earnings with solid income and increased revenue by more than 10% year-over-year. It also gave future guidance that exceeds year-over-year earnings.
  • Nike (NKE) has a market cap of $39.97 billion and operates in the footwear industry. The companies announced earnings that exceeded expectations with income that grew 15% year-over-year.
  • Discover Financial Services (DFS) has a market cap of $13.78 billion and operates in the consumer financial services industry. The company announced better than expected earnings that posted sales volume of $26.3 billion, an all-time record.
  • Wal-mart (WMT) has a market cap of $173.30 billion and operates in the retail industry. The company announced earnings that exceeded expectations and increased guidance for FY 2012.
  • Bed Bath & Beyond (BBBY) trades with a market cap of $14.42 billion and operates in the retail industry. The company announced earnings that beat expectations with higher earnings and revenue.
  • Research in Motion (RIMM) trades with a market cap of $11.14 billion and operates in the communications equipment industry. The company did not meet expectations with the most recent earnings report as sales, earnings, and outlook all disappointed.

Several companies have announce earnings yet the majority of reports is yet to come. The list above is only a few of the companies that have released earnings, yet these companies are among the largest, and cover a wide range of the sectors, and industries, that are most important to our economic growth. Each company beat expectations, with the exception of RIMM, and offered solid guidance heading into the future.

The market is a collection of individual companies that are priced according to fundamental performance and future guidance. Economic indicators and analysis are intended to give us insight into how companies may perform during upcoming earnings seasons. These companies have given us guidance on how they will perform into the future. And while I respect the great minds of Wall Street, I will take the advice from the company before I will gamble on analysts.

The majority of the large companies that have announced earnings have either met or exceeded expectations. And despite this fact, we continue to speak of the possibility of recession. I believe that if our economy were to continue its current path for an extended amount of time then we would eventually enter another recession. But based on earnings we have not crossed that path nor are we close. As long as companies continue to exceed expectations and post higher earnings year-over-year it tells us that we are headed in the right direction. I am not saying that our economy does not have issues but I do believe that we have overreacted in the markets. Investors must remember that we are recovering from the worst financial crisis since the depression, only 2 years ago.

I am curious to see how the market reacts over the next several months as earnings are announced. Will the market recover if earnings are good? Or will the market ignore the progress and focus on the issues in Europe or react negatively to Ben Bernanke's every word? I am anxious to see if we are capable of scaring ourselves into another recession with earnings that continue to rise.

The four stocks that pulled the market lower, that accounted for a total loss of nearly 220 points during the last two days, have given no reason to justify such loss. With the exception of Chevron, each company will probably exceed, or meet, expectations and give strong guidance for its future.

The four stocks that drove the market are just examples of the many stocks that lost value throughout the last two days. The seven stocks are just an example of earnings and individual companies that continue to outperform year-over-year, despite uncertainty. The 4 stocks that were mentioned weigh heavily on the position of the Dow Jones, and I believe that each stock is equally important during its recovery. I am bullish regarding the economy, because I have been given no reason to believe that we are headed toward another recession. I understand the global issues that are present, but earnings are what drives the market and until I see that earnings have diminished I will continue to believe that the majority of the market's loss is a reaction to panic. And if I am correct, and earnings continue to impress, then investors who buy at these low prices will be heavily rewarded as the markets recover a portion of their loss.

Disclosure: I am long DFS, MMM, CAT.

Disclaimer: As with any investment, due diligence is required. The opinions in this article are not intended to be used to make a particular investment or follow a particular strategy.