Expectations – Setting The Bar Low(er)

Low Bar

When it comes to the economy and the upcoming quarterly reporting season, it is all about expectations. And lately, those expectations are going way down.

How Low Can You Go?

With estimates for Q1 as well as Q2 still going down. It is hard to see sentiment changing in any meaningful way without any improvement in the earnings outlook.

Four short months ago some pundits were anticipating as much as a 0.7% rise in quarterly profits throughout 2016. And those expectations, believe it or not, were considered really good! Good enough for the fed to start to raise interest rates and break the QE cycle.

Fast forward to today and many analysts are expecting a 9% decline in profits with the biggest drag on the results coming from the energy sector. Take the energy sector out of the equation and one is still left with a 4% decline.

How Bad Is It?

Just three sectors are expected to post a rise in quarterly profits – healthcare, telecom and consumer discretionary. Even within these seemingly rosy sectors there are some notable thorns such as Apple is expected to post at least 10% lower profits.

And that is where the bar comes into play.

If analysts set the bar low enough so that even bad earnings seem good then the perception and expectations just might appear to be better than they really are.  In other words, easier to beat.

So far, in my opinion, they have not been able to do that.

My plan for investing this upcoming quarter is to stick with what has been working. Tech, some Healthcare and Discretionary stocks which had surprises last quarter.
Most of these companies are leaders or at least in the top tier of their industries and have shown consistent performance thru good markets and bad.

On a side note, there is a free newsletter I subscribe to, called The 10th Man, that had a very good write up regarding betting on the favorites. The winners, the industry leaders and not the losers or, in other words, the out of favor stocks stuck in downward trends. This falls into the stock investing strategies of don’t catch a falling knife and follow the money. I highly recommend signing up for all the free newsletters offered by this site but I especially like this one.

BTW: Whenever I am at the racetrack, which is usually on my wife’s and my anniversary, I never bet on the favorite to win. However I will usually bet on the favorite to show.

And now a question for my readers.

With the upcoming OPEC meeting in mind, do you think a strategy of buy the rumor – sell the news is worth considering? The anticipation is that an accord for capping production will be reached among the majority of members – excluding some notable names like IRAN. The theory being that even with their exemption(s), an agreement among other participating members will account for a production cap on 70% of the market. Pundits and analysts alike are thinking this is a good thing for oil prices – and for the world economy. Is a small position in an ETF like XLE with just this sort of “anticipation” in mind, a worthwhile play? My guess is that as time sets in folks will realize that we still have a glut of over-supply and the price of oil will at best stabilize if not go back down.

What do you think?

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7 thoughts on “Expectations – Setting The Bar Low(er)

  1. Funny you mention XLE. It is one of the ETF I use quite a lot to write puts against. I have just last week written a put. I hope you are right that the rumour will cause some oil price rally. stocks should follow then.

    1. Funny thing too, I bought a call on XLE probably right about the time you wrote your put. 😉
      Both done with the same reason in mind, that the price will rally in anticipation of the meeting.

      1. Good stuff… Looks like your calls are a better approch than my puts. Writing puts is a “slow wins the race” approach. I have not yet reached 50 pct of max profit… Maybe later this week.

  2. I think that the April OPEC meeting will be a non event but the draw down in oil inventories will have a bigger impact on XLE. The refineries will be gearing up for the summer driving season starting with the memorial day long weekend. Not sure if you guys are a little early on selling puts or buying calls, but keep an eye on weekly oil inventory numbers.

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