Earnings season is well under way, with Wall Street digging into the numbers with the hopes of divining how the stock market will finish a tumultuous 2019.
The S&P 500 Index SPX, -0.39% is up an impressive 19% this year, but in many ways that number is misleading. Measuring from September 2018 highs, those gains shrink to just a few percentage points. And more recently, the benchmark has struggled to hang on to gains since crossing the 3,000-point mark in July.
In many ways, this has made the stock market a kind of Rorschach test for bears and bulls — squint hard enough and you see exactly what you want to see.
And this earnings season, a number of companies share this confusing state of affairs. Based on certain criteria, there are reasons to get excited about equities, but seen another way, the numbers look downright nasty.
Here are three companies that seemed to win high marks in their recent earnings report that may actually be setting off warning bells, and three more that initially stumbled but could be worth a look.
Three earnings report that were worse than you thought
Netflix
Sure, Netflix Inc. NFLX, -6.15% jumped as much as 8% immediately after earnings, thanks to better-than-expected profits and subscriber growth. However, the underlying reality is that the growth trend is leveling off for Netflix, and pressures are only going to rise.
Read: Netflix finally admits the obvious: Competition from Apple and Disney will hurt
Consider that the 6.77 million new subscribers fell short of Netflix’s internal forecast of 7 million. And that the fiscal fourth quarter, which is the current quarter for which Netflix will report in January, features an incredibly high bar. Specifically, in 2018 growth was 8.8 million and Wall Street was hoping for 9.6 million. Netflix has predicted just 7.6 million in growth.
Oh, and by the way, the highly anticipated over-the-top service from Walt Disney Co. DIS, -1.12% goes online in November in addition to a renewed focus by Apple Inc. AAPL, +0.48% on its streaming offerings.
This trend is fundamentally why Netflix’s stock is down more than 20% from its 2019 highs. While Netflix may have rebounded modestly around earnings, investors need to be wary of placing too much trust in this stock as competition mounts and growth rates slow.
Domino’s
At first, it appeared that Wall Street was going to keep kicking around Domino’s Pizza Inc. DPZ, -0.29% after weaker-than-expected earnings on Oct. 8. However, for some reason investors have been optimistic lately, and the shares have been bid up about 7% compared with where Domino’s was before its latest quarterly report.
That makes little sense. Revenue squeaked higher, but in addition to missing earnings forecasts, same-store sales numbers also missed the mark, at 2.4% growth vs. expectations of 2.7%. And sure, the company is saving some cash by closing underperforming European stores, but that only reinforces the narrative that Domino’s is struggling to connect.
Last but not least, as CNBC’s Amelia Lucas noted, Domino’s CEO said the word “carryout” 17 times in its earnings call — a terrible sign as apps like GrubHub GRUB, -2.84% and privately held DoorDash have disrupted the prepared food biz and made every restaurant a delivery option.
The shares have struggled to push higher since spring 2018, and it seems awfully naïve that a breakout for Domino’s is in the cards considering these details. Worst of all, the company limited forward-looking projections to just three years instead of past practices of looking out as far as five years. That is a sure sign that investors may not want to rely on this stock beyond the short-term pop we’ve seen in October.
Nike
Longtime investors of Nike Inc. NKE, +0.57% know that the company has a habit of topping earnings forecasts, but a beat in its most recent report was particularly good news after a rare miss on the bottom line in the prior quarter. That helped allay some fears, and has caused a nearly 10% rally for Nike stock over the past month or so.
But investors shouldn’t get complacent. It’s easy to write off Nike’s miss earlier this year — the first time since 2012 — as a blip on the radar thanks to currency challenges. However, volatility in foreign exchange markets and uncertainty regarding tariffs and trade wars are not going away. Throw in the recent spat between the NBA and China and you see even more risk for this athletics giant.
Furthermore, the prior miss followed two quarters of decelerating earnings growth. A trend of plateauing profits amid these big-picture risk factors should not be simply shrugged off, then, after the latest earnings beat.
Nike’s stock has a much better trend line than either Netflix’s or Domino’s stock, with the shares currently up against a new 52-week high. However, investors may want to be cautious as we enter an important holiday shopping season.
Three earnings reports that were better than you thought
Goldman Sachs
Goldman Sachs Group Inc. GS, +0.03% has been in the news for all the wrong reasons lately after its lackluster earnings report. Beyond missing earnings forecasts and barely meeting the mark on revenue, weakness in its investing and lending division has hinted to some that this dealmaker is doomed to struggle, and that after one year on the job, CEO David Solomon still hasn’t provided a clear path to growth.
But naysayers may want to be more patient with Solomon. His key initiative of a massive internal review of the bank’s operations hasn’t happened quickly, but it is crucial to get this right instead of plot a hasty strategy. Furthermore, we’ve already seen signs of long-term vision as Goldman commits cash to new ventures in retail banking and corporate cash management in an effort to diversify operations. Managing the deposits of multinational mega-cap companies isn’t as sexy as underwriting a hot tech IPO, but it’s precisely the kind of measured strategy that will serve Goldman in the long run.
It’s hard to see the forest for the trees, though, amid headlines that Goldman struggled last quarter in part because its investments in sexy names like ride-sharing giant Uber Technologies UBER, -1.72% or biotech supplier Avantor Inc. AVTR, +2.65%. That hints at near-term trouble for both Goldman as well as for some of these newly minted stocks that have failed to live up to expectations.
But Goldman isn’t as bad as you think. The transformation away from reliance on deals like this will take time, and the massive brand power and global reach of this bank will see it through.
Levi
When you think about consumer brands on the upswing, Levi Strauss & Co. LEVI, +0.35% probably isn’t on the list. There’s tough competition for high-end jeans, and ever since stock IPO’ed earlier this year it has been stuck in a steady downward spiral.
But don’t let the initial disappointment in Levi after its March IPO scare you out of this stock. The brand still matters, and the fact that Gen X icons like Beyonce and Justin Timberlake are rocking Levis are proof that it can still be “old-school cool.”
And perhaps most bullish of all, Levi is at the forefront of a push for sustainable and ethical clothing practices, something the industry has struggled with in recent years. For instance, Levi has developed specialized lasers to distress jeans instead of using the child labor and harsh chemicals its competitors rely on to create that stylishly disheveled look. There’s also a dual-class structure that favors family owners and allows them to take a long-term view instead of managing the company quarter to quarter.
Sure, there are short-term pressures because of a trade war and the possibility of waning retail sales in key markets. And Wall Street hasn’t had much reason to celebrate this stock right out of the gate after mixed second-quarter earnings in July and more recent challenges from in-line third-quarter earnings in early October.
But between a long-term focus on sustainability and the steady resurgence of 1980s and 1990s pop culture themes, a period that was the heyday of Levi’s and Dockers, there’s a lot to like about Levi stock. Earnings haven’t been nearly as bad as share prices indicate, and patient investors may want to give this stock a second look.
Micron Technology
Micron Technology’s MU, -4.46% stock fell hard after earnings with a double-digit decline, owing to weaker-than-expected guidance. However, simply giving up on the chipmaker may be too hasty as there are also signs that a rebound is in the works in 2020 for the sector, and for Micron in particular, which is seeing “solid” demand growth, according to its CEO.
It’s no secret, after all, that things have been soft for chipmakers in the past year or so as a multi-year run has cooled off in a big way and short-term pops on acquisitions are now a thing of the past. But the supply-and-demand balance has improved after consolidation and cutbacks, and data-center demand is again showing signs of life after a recent Morgan Stanley report showed an uptick in expected server and storage sales.
Excess inventory and a general slowdown have weighed on Micron’s stock since its 2018 highs, but the shares have recently come back to life with a roughly 40% rally since summer lows. While disappointing guidance is not ideal, reasons remain to be optimistic about the longer-term trend for chip sales across 2020 since they bottomed out in the last year.
As proof, consider that in September a J.P. Morgan analyst raised his price target to $65 — 40% upside from here — based on an improving demand environment. This proves that, despite short-term volatility, you may not want to give up on Micron’s stock just yet despite the big move down after earnings.
Jeff Reeves is a MarketWatch columnist.