5 Things to Watch This Earnings Season

MILLBURN, N.J. (TheStreet) -- The third-quarter earnings season is upon us. As always during an earnings season, we need to prepare for and anticipate the messages that corporate America will send us via companies' results and their guidance for the quarter and year ahead.

With that in mind, here are the five things I will be most tuned in to:

1. Back-to-School Sales: Back-to-school sales were expected to be weak. So far we have some same-store sales data for retailers for the month of August. September has yet to be reported. Preliminary indications are that back-to-school sales were better than expected with a great deal of variance from company to company.

For example, Urban Outfitters ( URBN) remains strong, while Abercrombie & Fitch ( ANF) continues to struggle. Dell Computer ( DELL) computer, which relies heavily on back-to-school sales, did not provide guidance for the third quarter but noted that the market has stabilized.

As the quarterly results begin to trickle in, back-to-school sales are going to be a key indicator for the strength of the consumer and may help us to establish a baseline for holiday sales.

2. Holiday Sales: We are less than two months away from Black Friday, the first frenzied sales day after Thanksgiving when shoppers and the media storm retailers' doors as the official holiday shopping season gets under way. During earnings season, companies will provide investors with a glimpse into the holiday selling season in several ways.

First, we will get an indication how retailers are gearing up for the holidays in terms of their merchandise orders and how inventories are currently being managed. Second, we will get a feel for which products or product lines are going to be hot and which are not. Here's a hint: Sales of Beatles Rock Band are tremendous. This could have an impact on holiday sales for the likes of GameStop ( GME) or Best Buy ( BBY).

3. Smartphones: Unless you are living in a cave, you should know that smartphones are hot phones. In the last month we received disappointing results from Palm ( PALM) and Research in Motion ( RIMM).

With those facts in mind -- a hot market and disappointing results -- Apple ( AAPL) will be under the microscope when that tech company reports on Oct. 19. Apple will not only give us a clue as to how the smartphone business is performing but will also give us a glimpse into how well back-to-school and computer sales are performing.

Finally, sometime late in October, Broadcom ( BRCM), a mobile Internet chipmaker, will also report, proving us with more insight into the depth of the smart phone market.

Capital Expenditures: Capital expenditures, commonly referred to as capex in Wall Street parlance, are a metric often subordinated to the headline earnings results such as earnings per share, revenue, same-store sales and margins. So why is capex going to be so important this quarter? Here are a few reasons:

  • Capex will indicate the extent to which companies are willing to expand, redesign or upgrade existing facilities and stores.
  • Capex expenditures will indicate whether management sees a pickup in future business.
  • Capex expenditures will have a second order effect upon hiring, construction and technology.
  • 4. Media: There is no doubt that the media has been adversely affected by the recession. Television, print and Internet advertising all relied heavily on the financial, automotive and retail industries, which all experienced failures over the last year. Advertising sales plummeted. The likes of CBS ( CBS), Time Warner ( TWX), New York Times ( NYT) and even, to a lesser extent, Google ( GOOG) felt the advertising pinch.

    There are indications that advertising is turning around. For example, Adobe ( ADBE) just announced a $1.8 billion acquisition of Omniture ( OMTR), an Internet advertising optimization company. On the other hand, some of these media companies also produce movies, which have had a disappointing summer and a very unimpressive holiday release schedule.

    Media results can also be an indicator of a rebounding economy and perhaps investment opportunities in an industry that was considered down and out. Be careful not to make any bets just yet. Let's see what earnings tell us.

    -- Written by Scott Rothbort in Millburn, N.J.

    At the time of publication, Rothbort was long AAPL, BRCM, GOOG, RIMM and URBN, although positions can change at any time.

    Scott Rothbort has over 20 years of experience in the financial services industry. In 2002, Rothbort founded LakeView Asset Management, LLC, a registered investment advisor based in Millburn, N.J., which offers customized individually managed separate accounts, including proprietary long/short strategies to its high net worth clientele. He also is the founder and manager of the social networking educational Web site TheFinanceProfessor.com.

    Immediately prior to that, Rothbort worked at Merrill Lynch for 10 years, where he was instrumental in building the global equity derivative business and managed the global equity swap business from its inception. Rothbort previously held international assignments in Tokyo, Hong Kong and London while working for Morgan Stanley and County NatWest Securities.

    Rothbort holds an MBA in finance and international business from the Stern School of Business of New York University and a BS in economics and accounting from the Wharton School of Business of the University of Pennsylvania. He is a Term Professor of Finance and the Chief Market Strategist for the Stillman School of Business of Seton Hall University.

    For more information about Scott Rothbort and LakeView Asset Management, LLC, visit the company's Web site at www.lakeviewasset.com. Scott appreciates your feedback; click here to send him an email.

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