A method often used by investors is to buy what you know, and using this idea will occasionally work for those that want to keep things simple. Unfortunately, this approach can lead to severe mistakes as an investor falls in love with a particular stock and stubbornly doesn't cut losses. The psychology behind this makes sense, as most people don't want to admit what they know is wrong, but the losses that potentially come with this strategy must be avoided.
The market is at an interesting place right now where investors have been given an opportunity to sell at some of the highest prices of the year before we see earnings reports. Earnings season is fast approaching, and all signs point to ugly numbers coming our way. Due to this forecast, owning what you know might not be a great idea this quarter.
Looking at the chart below, we can see the deterioration in earnings estimates for Q1 and Q2, with Q1 expecting to be -11.1%. When a company reports in the coming month, investors need to expect very little in upside surprises and movement in stock prices will most likely be to the downside on any miss on EPS.
Some fear the economy is headed for a recession, but all that is important at the moment is where your stock is headed after Q1 earnings. There will be some winners of course, but it is best to be focused on potential losers and capital preservation when we see the potential of an earnings recession.
There is a good chance you do business with one of the major banks, but this doesn't mean you should own the stocks. Financials have had a rough year to date, with the Financial Select Sector SPDR ETF (NYSEARCA:XLF) down over 5%. If you own the stocks below, an alternative to selling them is to reduce downside risk by shorting XLF or buying a reverse ETF like the Direxion Daily Financial Bear 3X Shares ETF (NYSEARCA:FAZ). But for most, it would be best to wait on the sidelines until these companies report Q1 earnings.
Sell This List
Bank of America (NYSE:BAC) is a Zacks Rank #5 (Strong Sell) that is one of the world's leading financial services companies. The company provides banking and financial products and services for individual consumers, small- and middle-market businesses, institutional investors, large corporations, and governments worldwide. Bank of America has 213,000 employees and is based in Charlotte, North Carolina.
The company has a market cap of $133 Billion with a Forward PE of 9. The stock sports Zacks Style Scores of "F" in both Growth and Momentum. BAC pays a dividend of 1.55% and has expected EPS growth of 9.5%.
Q1 earnings will be out on April 14th and estimates for the current quarter and current year are falling. Over the last 90 days, estimates have been revised 31% lower, from $0.32 to $0.22. For fiscal-year 2016, estimates have been revised 10% lower, from $1.55 to $1.39.
JPMorgan Chase (NYSE:JPM) is a Zacks Rank #5 (Strong Sell) that is a financial services firm that engages in investment banking, financial services for consumers and small businesses, commercial banking, financial transaction processing, asset management and private equity. Chase has over 234,000 employees and is based in New York, New York.
The company has a market cap of $212 Billion with a Forward PE of 10. The stock sports Zacks Style Scores of "F" in Momentum and a VGM score of "D." JPM pays a dividend of 3.05% and has expected EPS growth of 6.86%.
JPM will report on April 13th, and estimates have been revised lower over the last 90 days. For the current quarter, we have seen estimates fall 18%, from $1.54 to $1.26. For fiscal-year 2016, estimates have been revised 8% lower, from $6.17 to $5.66.
Wells Fargo (NYSE:WFC) is a Zacks Rank #4 (Sell) that is a diversified financial services company, providing banking, insurance, investments, mortgage and consumer finance services. The company has over 264,000 employees and is based in San Francisco, California.
The company has a $238 Billion market cap with a Forward PE of 11. The stock sports Zacks Style Scores of "F" in both Growth and Momentum as well as a VGM score of "F." WFC pays a dividend of 3.19% and has expected EPS growth of 8.8%.
Q1 earnings will come on April 14th and estimates for the current quarter and current year are falling. Over the last 90 days, estimates have been revised 3.9% lower, from $1.02 to $0.98. For fiscal-year 2016, estimates have been revised 3.6% lower, from $4.39 to $4.23.
Citigroup (NYSE:C) is a Zacks Rank #4 (Sell) that is a global financial services company. It provides consumers, corporations, governments and institutions with a broad range of financial products and services, including consumer banking and credit, corporate and investment banking, securities brokerage, transaction services and wealth management. Citi has 231,000 employees and is based in New York, New York.
The company has a market cap of $119 Billion with a Forward PE of 8. The stock sports Zacks Style Scores of "D" in Growth and "F" in Momentum. C pays a dividend of 0.49% and has expected EPS growth of 5.1%.
Citi will report Q1 earnings on April 15th with low expectations due to falling estimates for both the current quarter and current year. Over the last 90 days, estimates have been revised 31% lower, from $1.51 to $1.04. For fiscal-year 2016, estimates have been revised 15% lower, from $5.67 to $4.82.
If you're long these banks, it might be advantageous to sell before earnings and consider a reentry at lower prices. If a short position is desired, stick to the ETF approach rather than try to pick individual losers. The industry will continue to be sluggish, and shorting the group as a whole will have less risk.