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Earnings Season Kickoff

Last week proved to be quite busy for the stock market.  A broad-based market pullback came in conjunction with strong earnings across the board.  I'll be watching this week, but my gut tells me that this sell-off is long overdue, as multiple technical indicators had been signaling overbought conditions for an extended period of time.  I spent the past week listening and digesting earnings news; many of my stocks recently reported.  Here's how I did:


Account 1 Performance as of 21 January 2011
Symbol Price ($) Price Change (%) % of Portfolio
* CASH     18.6%
Apple (NASDAQ:AAPL) $326.72 -6.2% 13.9%
Citigroup (NYSE:C) $4.89 -4.7% 24.0%
-F120121C17.5 $2.77 -13.4% 7.1%
International Paper (NYSE:IP) $27.91 -2.7% 24.1%
JP Morgan Chase (NYSE:JPM) $45.29 0.8% 19.4%

Cash holdings now take up a larger portion of account holdings, due to the decrease in value of other account holdings.  Other research highlights are below:
  •  AAPL - Wow, what a week.  CEO Steve Jobs takes another medical leave of absence, sending the stock into an overnight tailspin.  I'm kicking myself, literally, for not buying more after the stock was down to $330 the morning after the announcement (like I told myself to do); I could have sold later in the day for over $342.  Then came the earnings report on the 18th and, wow, just wow.  Everyone knows the numbers were simply stunning, Year-over-year revenue growth of 71%, operating margin of 29.3%, and earnings of $6.43 per share.  However, the conference call made even more impressive statements, that have not been as widely quoted in the media.  50% growth in the Asia-Pacific / Japan region of the world lends to Apple's credibility as a world-wide presence, supported by the statement that the Apple stores with the highest traffic and revenue are in China.  The iPhone 4 will be available to Verizon users on 10 February, which allows Apple to target more than 19 million customers.  The phone is still experiencing supply shortages, which is concerning this far into production.  However, this shortage does not appear to have affected consumer and particularly enterprise (corporate) demand, as 88 of the Fortune 100 companies now deploy the iPhone in their IT architecture.  Similarly, the iPad is seeing increasing usage among enterprise IT.  The iPad can allow businesses to cut down on paper usage, saving money and appealing to the new, "green" movement.  I would use any weakness in the stock below $320 this week to buy more.  At this point I'm staying away from playing this stock with options, as the time-premium for most options contracts, even those that are deep in the money, is not particularly attractive at this time.  Should the stock move sideways for an extended period, then this premium may be reduced.
  •  C - What a gift.  The stock "disappoints" and sells off.  I was not disappointed with their earnings.  Even though they missed earnings by 50% ($.04 / share reported vs. $.08 consensus estimates), many of their core metrics improved dramatically.  Citi Holdings (the "bad bank's" assets) decreased by $128 billion, now making up about 19% of Citi's overall balance sheet.  Most of their earnings miss can be attributed to a volatile trading environment, especially in the bond markets.  However, their expenses were also up 8% from the previous quarter, which were attributed to losses from foreign-exchange (or volatility in the value of the US Dollar) and higher legal costs (largely as a product of financial regulation uncertainty).  However, credit-losses were down 12%, with increased profitability seen from their partnership with Morgan Stanley (NYSE:MS).  Citi also further reduced their mortgage portfolio, keeping a loan loss reserve balance in Citi Holdings to cover over two years worth of credit losses for these mortgages.  While many market participants were disappointed with this report, a quote from Citi's management was "one quarter doesn't make a trend."  I would take a price under $4.80 as a gift and buy more, as the stock should make a run at $6 by the end of the year, once the bank is able to further reduce the size of Citi Holdings.
  • JPM - The world's best bank keeps getting better.  Results should have been much better than announced, as supported by the conference call where CFO Doug Braunstein stated that the increase in litigation reserve reduced EPS by $.22 / share (18% of reported earnings).  While expenses were up $4.2 billion year-over year, most of that increase was caused by higher performance-based compensation; higher performance = higher returns.  JPM is noticing an increase in market share in terms of consumer credit, as "more people take their Chase cards out of their wallets at the store."  This further supports the idea that American consumers are increasingly optimistic about the state of the economy, and are more comfortable with increased spending.  One disappointment from the conference call was even though returning capital to shareholders was mentioned briefly, no specifics were mentioned.  CFO Braunstein specifically mentioned that he did not believe acquisitions were the most effective use of capital, that instead that the best use would be for "organic growth," which I take to mean that there will be no future large-scale acquisitons like WaMu on the horizon.  The bank is well-capitalized, but still stands to profit further with additional clarity on US financial regulations, as the bank has been one of the more conservative institutions as far as capital reserves on this topic.  Once a dividend increase / share repurchase plan is announced, I will re-examine this position, and perhaps do a little profit-taking.
Switching gears to the second account:

Account 2 Performance as of 21 January 2011
Symbol Price ($) Price Change (%) % of Portfolio
* CASH     3.0%
Ford (NYSE:F) $17.95 -3.8% 26.8%
General Electric (NYSE:GE) $19.74 4.9% 21.0%
Harley-Davidson (NYSE:HOG) $35.99 -2.7% 15.3%
Intel (NASDAQ:INTC) $20.82 -1.2% 31.9%
Verizon (NYSE:VZ) $34.95 -1.4% 17.3%

Overall, a smaller decline was noted among these stocks, mainly caused by their larger dividend payouts (except Ford), which provided a cushion to the market's recent decline.  Some highlights:
  •  F - on the 20th, Ford signed a Memorandum of Understanding [MOU] that will allow the automaker to explore exporting vehicles to China.  As more working class citizens in China look to acquire vehicles, Ford stands to capitalize on this burgeoning middle class.  Ford has been accelerating their growth efforts in China, in an attempt to take market share from a revamped General Motors (NYSE:GM) and other car manufacturers.  The price decline caused a large decline in the options contract in Account 1, due to implied volatility in the options contract.  I am waiting until after the company reports earnings to make any moves into or out of the stock.
  • GE - Great earnings report.  33% increase in EPS, with infrastructure orders increasing 12%.  I need to look over these earnings reports; I must admit that time ran out on my week this week. 
  • INTC - I loved this conference call, and apparently so did most other investors.  The stock did not sell off as much as after many recent earnings reports, signaling investors' acceptance of Intel's increased strength.  Intel reported a staggering 24% increase in revenue, in an industry that is being hit with increased competitiveness and decreased overall margins.  PCs grew by 17% in 2010, which helped to make it the best year in Intel's history.  As more devices hit the market, they will need processors, which is where Intel comes in.  Additionally, the increase in cloud computing puts more demand on common servers - servers powered by Intel chipsets.  One concern is that Intel set the bar pretty high, anticipating 10% revenue growth in 2011 over 2010.  However, if they can blow that number out of the water (CEO Paul Otellini may have slipped when he initially said 20% revenue growth only to be corrected by CFO Stacy Smith) then Intel could prove to many investors that their stock price deserves to be much, much higher.
Overall, considering the pullback, this week wasn't all bad.  I got a great buying opportunity that I hope to capitalize on this week.  That's it for now; more next week.

Disclosure: Long AAPL, C, F120121C17.5, IP, JPM, F, GE, HOG, INTC, VZ.

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