VIEW ONLINE Earnings season has been unusually terrible for many companies — here's what investors are rewarding, and how to get in on the action
- In an unusual development, traders are punishing companies that beat third-quarter earnings expectations.
- This earnings season coincided with a rough month for the market, worsening the selling.
- Strategists at Deutsche Bank have laid out what the stocks that are outperforming have in common, and some factors investors are not rewarding.
Even the good companies are getting punished by Wall Street.
This earnings season, many companies that are beating analyst expectations for profit growth are not being rewarded with gains in their stock prices.
Stocks typically rally during earnings season because traders see proof of profit growth and the potential for future earnings. Also, companies resume repurchases of their own stock, which helps boost their earnings per share.
But since the start of the third-quarter season, stocks have fallen 1.7%, according to Binky Chadha, Deutsche Bank's chief global strategist. If this trend holds, Q3 would be only the third season with negative returns in the last five years, he said in a note.
Data released last week by Bank of America Merrill Lynch also showed that traders were punishing early earnings reporters with negative share-price reactions. According to the firm, this trend can be taken as a sign that the bull market is near the end of its cycle, since it appears that traders are exhausting their rewards for good news.
Read more: Stocks are doing something not seen since the tech bubble — and it's a signal the decadelong bull market is on its last legs
The peak of Q3 earnings season coincided with a volatile month for the stock market, and many issues came to the fore of investors' minds in addition to earnings results. The momentum behind high-flying tech stocks faded, companies shed light on the damage from the US-China trade war, there were signs that business investment was slowing even after tax cuts, and inflation concerns flared up.
And yet, some companies have weathered the storm by scoring rallies after they beat earnings expectations. Here's what they have in common — and what traders are not rewarding — according to Chadha: - Stocks that outperform have higher margins and are cheap on a variety of metrics — but high-valuation, momentum stocks have underperformed.
- Stocks that outperformed prior to their earnings (especially in the month before) are getting punished, and those that underperformed are being rewarded.
- Companies with higher profitability ratios are underperforming, and those with higher tax rates are outperforming.
- Companies raising dividends and share buybacks have tended to outperform.
- Having high growth in sales and earnings or high return on equity has not helped.
- Also, companies issuing more debt or equity have been punished sharply.
- Highly shorted stocks are being punished.
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