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Sozzi's Daily Dose: Can You Spot What's Up?

I am maniacal with my personal stock coverage universe. Although I won't be covering anywhere near the 60 companies as I did back in the day, 20 or so is a nice sweet spot to be in.

I didn't even realize that as of today, I am 75% bearish on a coverage list, comprised of retailers, tech, industrials and, yes, a homebuilder (Toll Brothers (TOL), Buy rating). Is this justified? Or, do I have a case of winter depression influencing my stock picking?

You are darn right the bearishness is justified. I am unsure what my Wall Street peers are smoking, but earnings results trickling in are bad, as is forward guidance.  Not lukewarm. Not so-so. BAD. The stocks are getting hit and that is beginning to extend to peer comparables. There is no sign of this magical capex boom that was hyped up at the end of 2013 in numerous I-bank strategist bibles, certainly not in the financial statements of IBM (IBM), AMD (AMD) or Texas Instruments (TXN) yesterday evening. 

Here are the three key trends I am seeing while navigating the only storm of relevancy in my life: earnings season.

Sequential fundamental trends: Underpinning the market's continued bullishness is an expectation that an accelerating U.S. economy feeds into the financial statements of Corporate America. To me, that means companies should have gained noticeable operating momentum in 4Q 2013 vs. 3Q 2013. I have not seen it yet, nor is it being baked into earnings guidance ranges that are falling below the lowered hurdle rates of the Street.

Revenue growth: Sort of a tie in with the above thought, an improved economy and muted consensus earnings forecasts should be translating into strong revenue beats and a bottom line print that at least clears by $0.02 per share. Excluding the financials, I haven't observed this occurring either. Instead, I am left digesting dour commentary from a Family Dollar (FDO) on Jan. 9 that it's now forced to invest in lower prices due to a reduction in food stamp benefits to households earning $25,000 a year pretax and less.

Sell side: In the wake of the initial round of earnings ugliness, analysts continue to be too optimistic in their earnings assumptions. I feel this in studying the work of peers as I tighten up estimates ahead of quarterly reports. I have seen it in Best Buy (BBY) and Family Dollar and others in different sectors. I am thinking there will need to be further estimate cuts midway through 1Q 2014 as conference seasons kicks into high gear. Theoretically, with the winding down of Fed liquidity and subsequent multiple compression and a reduction in earnings estimates, it should be a recipe for a spring swoon in the markets. Just sayin'.

Around the Horn

  • Be on the lookout for bad news from J.C. Penney (JCP) shortly. That's all I can say on this matter.
  • Reiterate that February 2014 will contain an earnings warning from Wal-Mart (WMT). The stock is breaking down on high volume in advance of that dread.  Here's that call.
--By Brian Sozzi in New York.

At the time of publication, the author had no positions in any of the securities mentioned.

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