I enter earnings season with a negative short-term mindset -- a very reactionary attitude. Something doesn't sit too well. We're seeing mounting data letdowns, a large macroeconomic risk the market has chosen to ignore -- i.e., the fiscal cliff -- and rose-colored glasses like bottoms-up estimates on 2013. While you sit on the sidelines, start thinking about where the next positive catalyst or "tell" could appear from. That's what I'm doing.
The Bucket Shop Rumor Mill
- I fully anticipate Bill Ackman to defend JCPenney (JCP - Get Report) if he's asked about the company's progress at this week's Value Investor Conference. Last time he commented on the company a couple months ago, the stock went on a good run. However, the stock has recently demonstrated a knack for trading on the dreadful fundamentals in store for at least the next six months, so I remain cautious.
- If David Einhorn is in fact short Lululemon (LULU - Get Report), the Value Investor Conference is likely where he will show his hand.
The Advanced Investor Lesson: P/E Multiples
An interview in Barron's offered a succinct investing lesson for all you hardcore Ben Graham disciples. Be aware of when to assign a company a price-to-earnings multiple that, due to a fundamental change in the business, is not in keeping with its historical or sector norm. The example given was Delphi (DLPH - Get Report), normally a low-P/E business (think 5x to 8x) as a result of its commodity operations. Upon exiting bankruptcy, the company is generally in faster-growing arenas, lacking the exposure to low-margin businesses of yesteryear. As a result, Delphi warrants a higher P/E multiple, with the Barron's interviewee suggesting one of 10x to 13x -- typical for an industrial.
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