The Right Numbers Don't Lie

It's linked quarter, stupid, not year on year. So many people seem so stymied by the down-25% quarters they are seeing, that they can't figure out why any stock would run on these numbers. The answer is that people are looking at the wrong comparables. They should be examining linked quarters -- how a company did this quarter versus the previous quarter and taking into account the seasonality of quarters. The third's usually worse than the second, because of the summer, so these numbers have been pretty darned good.

A case in point is Eaton (ETN - commentary - Trade Now), which just reported. Eaton's numbers are miserable against last year and it seems like business has fallen off a cliff. But if you read through the release, you will see pick-ups in some important industries, including residential and commercial electric, trucking and best of all, CARS (think JCI)! Indeed, Eaton is seeing sequential growth of 12-14% in electrical -- take that quarter to quarter... that's gigantic growth!

Consider the actual numbers. Last year, Eaton reported $4.1 billion in revenues and $1.95 in earnings per share in its third quarter. This year, it reported $3.0 in revenues and $1.21 in earnings. Pretty abysmal.

Now consider the link: $2.9 billion in revenues and $0.23 in earnings in Q2, versus $3.0 and $1.21 in Q3, with guidance for even better in Q4.

That's what drives stocks.

The linked numbers make sense of the moves in a host of industries, particularly tech, where they are downright spectacular. It is one of the reasons why I like Intel (INTC - commentary - Trade Now) so much, as it produced the classic strong linked quarter, when it has typically reported the classic weak quarter on quarter. Actually, almost all of tech surprised on a link basis, except Dell (DELL - commentary - Trade Now) and IBM (IBM - commentary - Trade Now).

Without this prism, most of the moves are pretty much lost on people. That's one of the reasons I think that the pall's been cast over the reporting of the quarters, but not the reaction to the quarters. The trigger pullers are simply anticipating when we will have good year-on-year numbers, which always follows great quarter-on-quarter numbers.

Random musings: Eaton's Europe business is turning. We are still lagging, as we do in everything, because of the failure of our stimulus plan, which now only seems to have busted the budget... Sunstone Hotel Investors (SHO - commentary - Trade Now), a small hotel REIT and supposedly the worst segment of REIT-land, did a secondary Friday at $7.20 and is now at $7.86! Huge!

At the time of publication, Cramer held no positions in the stocks mentioned.

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