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Big Earnings Releases Deliver For The Market By: Charles Payne

|Includes: AEO, Dell Inc. (DELL), EDS, HPQ

Okay, so yesterday I wrote about the sobering news that very few people made money during this rally, which is shaping up to be a once-in-a-lifetime window of opportunity. Just think what it means that close to $50.0 billion came out of stock funds as the market was in the bottoming out process. There would have been so much more money for retirement, many people planning to go back to work maybe could be positioned to go fishing instead. Just imagine if people were adding $50.0 billion into stocks as the bottom was being put into place. Wow! Then, there is the $250.0 billion poured into bond funds...play the "what if" game with that and tell me how much better off people would be right now. The stock market is only gambling when investors decide to approach it that way. By the same token, while everyone should be in the market long-term it's rare that there are stocks you can buy and just hold until the end of time.

There are some stocks you can buy and hold for long stretches of time but that can set you up for complacency. It's going to take more than simply buying and holding to make money these days. Granted, we have tried to be nimble with the market, but we've had subscribers in it throughout the worst of times. So, what I want to do is make sure you people understand that even if there is a pullback in the broad market there will be individual names worth holding and worth buying. It takes serious effort. We have a research team and I still put in more than 100 hours a week, every week. And that's on weeks when there are deluges of corporate earnings.

How to Pick Stocks for the Long Haul

Let's do a brief case study on a couple of household names to see how simply it would have been for individual investors to make a smart long-term investing decision. Dell (DELL) and Hewlett Packard (NYSE:HPQ) are two legendary American companies that highlight the best in ingenuity, hard work, and imagination.

These companies have been battling each other for years, with the upstart out of Texas riding through like Hannibal crossing the Alps and turning not just Silicon Valley upside down but the world of manufacturing, too. Hewlett Packard was caught flat-footed, resting on its laurels and never saw what hit until it was too late to hold onto the number one spot as global PC seller. With its just-in-time manufacturing scheme Dell was a whirlwind, stepping up to take the leadership baton from the likes of Microsoft (NASDAQ:MSFT) and Intel (NASDAQ:INTC) in a brand new environment. In fact Michael Dell was a perfect face for the internet age as an outsider ready to take on the world.

Hewlett Packard became a juggernaut for decades, but began to overreach with the infamous acquisitions of Compaq and Digital Equipment. For a long time, management was an issue, too, until Carly Fiorina took the reins. Unfortunately, she fell victim to tough macro trends and internal politics but make no mistake, much of the current success of the company has her fingerprints all over it. Of course her successor, Mark Hurd, is no slouch and in fact is considered one of the best CEOs in the world. The company is once again a juggernaut, and even its recent acquisitions (NASDAQ:EDS) are seen in a positive light.

The battle has had its ebbs and flows, as has the share prices of these two American success stories.

Reversal of Fortunes

Look at the chart below and tell me when you think Hewlett Packard overtook Dell in worldwide shipments of personal computers.


You guessed it, in the third quarter of 2006 HP moved ahead and never looked back in its battle with Dell, which had 18.1% market share in 2005 (and saw its share surge to 20.1% in the fourth quarter).

Not only has Dell fallen behind its American, rival but in the third quarter of 2009, all the key players in this industry enjoyed market share gains at the expense of Dell.

I'm sure millions of investors are holding shares of Dell, and had it when it peaked at $50.00 in April 2000. Maybe one day they'll get back to that lofty level but the water under the bridge, the time that can't be recaptured, will make the wait heartbreaking.

Data sources include Gartner Group, IDC, WSJ, Wikipedia, Dell Corp., and Hewlett Packard

Yesterday's Session

I love sessions that go through some doubt and struggle; that's what happened yesterday as the market fended off the urge to sell (a natural urge) and confusion over corporate earnings. Moreover, I was extremely impressed with the volume, particulaurly in stocks that moved higher.

Today's Session

It's all about earnings again today, and once again, investors have to grapple with adverse knee-jerk reactions to otherwise good (some would say "great) results.

Google (NASDAQ:GOOG) lived up to the hype, posting earnings of $5.89 per share on revenue of $4.38 billion; the Street was looking for $5.42 per share and $4.24 billion.

  • Average price per click: -6.0% y/y
  • Mobile phone searches: +30.0%
  • $22.0 billion in cash, but no buybacks
  • Admin. Costs of $389.6 million from $507.0 million as workers decreased to 19,665 from 19,786


Company CEO Eric Schmidt says "Android adoption is about to explode"...that would be fitting since that's what the stock did in the after-market period.

IBM (NYSE:IBM), formerly known as "Big Blue", may be a fitting name considering the stock was nicked good in the after-market even after posting solid results. The company earned $2.40 per share on $23.6 billion in revenue; the Street was looking for $2.38 per share on $23.9 billion in revenue.

  • Revenue was down 7.0% y/y but +1% q/q
  • Management raised guidance for the third time for the quarter, and says company remains well ahead of the 2010 road map for $10.00 to $11.00 per share
  • Services contracts -7.0% (this might be what sent the share price diving in the after -market


General Electronic (NYSE:GE) beat on the bottom line but missed on the top line...big-time! The company earned $0.22 per share on revenue of $37.8 billion; the Street was looking for $0.20 per share and $39.5 billion, respectively. The big problem is GE Capital. Capital Finance highlights include:

  • Commercial lending revenue -28.0%; profits -65.0%
  • Consumer revenue -26.0%; profits -45.0%
  • Real estate revenue ($538.0 million) versus last year $244.0 million
  • Energy financing revenue -62.0%; profits -87%


Timmy Giethner says he doesn't want to be too early...my question is would he rather be too late.

Bank of America (NYSE:BAC) had a clunker of an earnings report this morning, missing consensus on the bottom line. The report is more of a disappointment following upside results on the bottom line by rivals earlier in the week. Although capital ratios appeared solid, the credit loss reserve number stood out prominently.

  • Revenue: $26.04 billion; consensus $27.6 billion
  • Provision for credit losses: $11.7 billion, down q/q
  • Reserve for credit losses were lower q/q as delinquencies slowed


Morning Notes from WSS Research Desk

Brian Sozzi

As I pointed out in yesterday afternoon's Hotline report, I had the great pleasure of attending the American Eagle Outfitters (NYSE:AEO) fall/holiday assortment preview. Getting out from behind the desk, talking with management, and seeing the collection was a great experience for a true nerd such as myself. In addition, we were able to tour the American Eagle Outfitters store on 34 Street in NYC, which was set with all the holiday wares we had laid eyes on during the runway show earlier in the day. I will undoubtedly have more to say on my learnings next week, but I wanted to provide some initial color this morning.
Big takeaways:

  • Management has planned inventory up for holidays (mid-single digit percentage); if current trends in the business continue (strength in denim and knits, for example) the company's inventory position could bring it increased market share (rivals have planned very conservatively for holiday)
  • Reducing spring deliver times to 45 days from 90 (very impressive; increases merchandise newness in the stores)
  • Aerie intimates business a 500 store opportunity (over a 100 currently)
  • Finally getting serious internationally, starting next year
  • Holiday products very differentiated relative to Aeropostale (NYSE:ARO) and (NYSE:ANF); I think it's a nice sweetspot
  • Price is right
  • Quality has come down (I touched every piece of clothing there) but is still better than Aeropostale. I think they are saving a ton on costs, invested some back into the product, but definitely saved some to bring into the gross margin line.

Written by Charles Payne, CEO and Principal Analyst of Wall Street Strategies (wstreet.com) providing independent stock market research to over 30,000 subscribers, in more than 60 countries. Mr. Payne is a regular contributor to the Fox Business and Fox News Networks. For more information about Mr. Payne, please refer to the company’s website www.wstreet.com.