Market Preview: That Frothy Feeling

Updated from 8:13 p.m ET to include added analyst commentary on Peet's and Moody's decision to downgrade a number of European countries.

NEW YORK ( TheStreet) -- Timing is either everything or nothing apparently. Maybe it depends on when you consider the notion.

On Monday the market got back to its winning ways, reclaiming most of Friday's losses and putting the bears on the run once more.

The impetus for the buying was fairly opaque, some combination of hand-clapping because Greece managed to fall in line with another round of austerity promises to get the money it needs to stave off default again from Europe's leaders. Other factors were mildly favorable reviews of President Obama's budget plan, and infectious enthusiasm about Apple ( AAPL) cresting above $500 to reach a new all-time high.

Nothing all that concrete for the broad market but the bulls were back nonetheless, maybe drawing some courage from the Barron's cover story over the weekend that trumpeted a high probability of the Dow Jones Industrial Average topping 15,000 in two years.

The odds of the blue-chip index reaching 17,000 in that span are 50-50, Barron's also stated, citing "cyclical patterns of market history" that it takes a full five paragraphs to reveal are the product of a single source, Wharton School finance professor Jeremy Siegel, who unsurprisingly has a book to sell.

The sentiment is fine for what it is, and data is integral to market analysis, the more of it the better usually being a good rule of thumb. But there's something downright frothy about getting this carried away so soon. The article glosses over the current state of the U.S. economy and Europe's debt problems, basically saying fears have subsided on both fronts so away we go.

The argument can be summed up as the last five years have been so bad on a cumulative basis, the next two years have to be really good to keep up with various patterns stretching across 141 years of equity performance. Anytime 1871 is used as a reference point for where stocks are headed in 2012, there's some serious market timing at work.

But as anyone investing in stocks knows it's all about when you get in and when you get out. There's no doubting the patterns -- that's the past and it's smart to take into account -- still fundamentals matter too, especially when the U.S. is still coming out of a generational financial debacle.

For example, the article argues that stocks underperformed in 2011 vs. the earnings growth that corporations were able to deliver. But that growth is coming off the decimation following the bursting of the credit bubble, and it's expected that topline growth in the current quarter is going to be hard to come by. Estimates have been going down for months, and 20% of the S&P 500 warned this time around. How confident should anyone be in guidance right now?

This is not to say stocks aren't looking good. The macro-environment has improved: The employment data is getting better; the Fed is promising maximum accommodation, maybe even a dose of QE3; Europe has stabilized somewhat; earnings have been solid enough; and there's always Apple to swoop in and save the day with an iPod in every home, rather than a chicken in every pot, since history class is in session.

But it may make more sense to wait for the Dow to make a solid move above 13,000 before looking so far beyond. Right now, the frothy feeling of the bulls is contagious but traders don't just buy, they sell too, and retail investors need to be careful not to get left holding the bag.

While on board with the prognostication, Ed Yardeni of Yardeni Research had a little fun with the article Monday morning. He's a bull and is targeted 1450-1550 for the S&P 500 by the end of 2012, which he estimates would translate to 13,825-14,720 by year-end for the Dow.

"Needless to say, I agree with the Dow 15,000 target on the front cover of Barron's," he wrote. "The only problem I have with it is that it is on the front cover. That's usually a curse."

As for Tuesday's scheduled news, get ready to count some digital chickens and cows because Zynga ( ZNGA) is issuing its first-ever quarterly report since going public in mid-December. The maker of games like FarmVille and Mafia Wars priced its IPO at $10 per share on Dec. 16, and the stock has jumped of late, owing mostly to enthusiasm stemming from Facebook's IPO filing on Feb. 1.

Facebook disclosed that it derived 12% of its revenue in 2011 from Zynga, roughly $450 million, and the stock soared from a close at $10.60 on Feb. 1 to an intraday high of $14.44 on Feb. 3 before closing Monday at $13.42, up 34% from the IPO pricing.

Wall Street is looking for earnings of 3 cents a share in the December-ended quarter from Zynga on revenue of $302.4 million. The analyst coverage is pretty mixed with six hold ratings, one underperform, three buys, and seven strong buys.

Sterne Agee is the Zynga skeptic, rating the stock at underperform with a $7 price target, and the firm thinks the Facebook disclosure hasn't done the shares any favors.

"Driven by the recent Facebook IPO-related hype, we believe ZNGA shares remain overvalued. 4Q 'whisper' bookings expectations have increased considerably post Facebook's S1 filing and appear to be in the $310M-$320M range (versus consensus of $304M) and seem too high," Sterne Agee said, adding later: "Our bookings estimate represents a 6% sequential increase, which is comprised of 1) a 3% sequential increase in unique payers to 3.5M in 4Q versus 3.4M in 3Q; 2) a 2% increase in average spending per payer (ZNGA calls it 'unique payer bookings per unique payer') to $74.50 in 4Q versus $73 in 3Q."

Sterne Agee basically thinks the valuation of the stock is stretched, especially in comparison to its peers in the space.

"Based on EV enterprise value to EBITDA earnings before interest, taxes, depreciation and amortization calculations, ZNGA shares are currently trading at 25x and 19x our FY12 and FY13 EBITDA estimates," the firm wrote. "This is a more than 100% premium to a select group of key internet companies trading at 11x and 9x FY12 and FY13 consensus estimates."

Check out TheStreet's quote page for Zynga for year-to-date share performance, analyst ratings, earnings estimates and much more.

Peet's Coffee & Tea ( PEET) is also reporting its fiscal fourth-quarter results after the close, and the average estimate of analysts polled by Thomson Reuters is for earnings of 43 cents a share on revenue of $103 million. The revenue view represents sequential growth of nearly 13%, which would be the best showing for the company this year.

Though it's got a lower profile than Green Mountain Coffee Roasters ( GMCR) and Starbucks ( SBUX), Peet's is the leader when it comes to stock appreciation with shares rising more than 60% in the past year vs. gains of 36% and 45% for Green Mountain and Starbucks, respectively.

Peet's stock closed at $67.70 on Monday, and it reached a new 52-week high of $69.97 on Feb. 8. The company has beaten Wall Street's earnings expectations in seven straight quarters ahead of this report, delivering an average upside surprise of 10% over that span. The sell side is mostly on the sidelines with five of the eight analysts covering Peet's at hold, and the 12-month median price target sitting at $70.

One of the Peet's bulls is Robert W. Baird, which upgraded the stock to outperform with a $76 price target on Feb. 3 when the shares were still trading at around $62. The firm isn't really all that jazzed up about the company's prospects for the fourth quarter; it's rather looking further down the road, saying "longer-term oriented investors should consider building positions ahead of a potential sharp acceleration in earnings growth in the second half of 2012/2013" when coffee costs come down.

"We think PEET can hold a premium valuation, allowing for strong earnings growth to propel the stock over the next 12-24 months," Baird wrote, adding later: "We are not necessarily expecting results for Q4-11 (modeling EPS - 10%, consistent with consensus) or first half 2012 to be meaningful catalysts, given short-term cost headwinds."

The firm noted that near-dated futures for green coffee, which represents roughly 20% of Peet's revenue, have come down to a 12-month low, falling 14% year-over-year, a factor that should set the company up for "a multi-year stretch of earnings growth well above 20%, particularly if top-line momentum continues."

Baird would also view a move by Peet's into the single-cup market as a positive, although it doesn't think this is central to the strong earnings growth it's expecting over the long term.

Another voice from the sell side is Dougherty & Co., which has a neutral rating on Peet's but lifted its price target on the stock to $72 from $50 on Feb. 10, citing its own expectations that earnings will accelerate after the March quarter ends. The firm is looking for earnings of 43 cents a share in the fourth quarter on revenue of $102.2 million, saying it thinks Peet's execution was "OK, but likely not better than that."

The single-cup strategy plays bigger in Dougherty's positive thesis for Peet's though.

" W e continue to believe PEET is the brand best positioned to capitalize on single-serve as this is the most expensive way to consume coffee at home and PEET is the most expensive national brand," the firm said. "We believe competitive developments and expiring IP for GMCR will open the door for PEET to access the single-serve market in 2013."

Check out TheStreet's quote page for Peet's Coffee & Tea for year-to-date share performance, analyst ratings, earnings estimates and much more.

Tuesday's morning roster includes reports from Applied Digital Solutions ( DIGA), Arbitron ( ARB), Asbury Automotive ( ABG), Avon Products ( AVP), BorgWarner ( BWA), Fossil ( FOSL), Goodyear Tire ( GT), Hospira ( HSP), Intercontinental Hotels Group ( IHG), LCAVision ( LCAV), Marsh & Mclennan Cos. ( MMC), Omnicom ( OMC), Valspar ( VAL), Watson Pharmaceuticals ( WPI), and Zipcar ( ZIP).

The late shift features Active Power ( ACPW), American Capital Strategies ( ACAS), Aware ( AWRE), Bob Evans Farms ( BOBE), Given Imaging ( GIVN), j2 Global Communications ( JCOM), MetLife ( MET), and Weight Watchers International ( WTW).

Tuesday's economic calendar includes retail sales for January at 8:30 a.m. ET, consensus view up 0.8%, according to; export and import prices data for January at 8:30 a.m. ET; and business inventories for December at 10 a.m. ET.

There's also the National Federation of Independent Business sentiment survey for January at 7:30 a.m. ET, a report that Ian Shepherdson, chief U.S. economist at High Frequency Economics, calls "the most important business survey -- if not the most important economic release -- of the month."

Shepherdson is looking for a bump in the survey to 95 from 93.8 in December, a performance that would be the fifth consecutive monthly gain and the highest level since October 2007. He's especially hopeful about increases in capex and inventory numbers, which have been creeping higher but are still well below normal levels, as is hiring.

"With bank lending to businesses continuing to rise rapidly and last year's shocks fading, we think that both capex and inventories will rise further in the January report," he wrote in commentary released late Monday. "Indeed we think the key feature of the economy this year will be the sustained revival of small business investment, and the NFIB survey should tell us about it in advance."

Meantime, the after-hours session was fairly quiet with Rackspace Hosting ( RAX) managing to exceed the heady expectations of investors for cloud computing companies and gain another 6% in late trades. Yingli Green Energy ( YGE) was also jumping in extended trading, rising more than 5% after inking a $100 million strategic agreement to purchase photovoltaic materials from DuPont ( DD) .

Also, expect some hand-wringing about Moody's moving to downgrade six European countries, including a two-notch drop for Spain, and lowering its outlook for France, Austria and the United Kingdom.

The move follows a similar action by Standard & Poor's in mid-January, and though it's not a huge surprise, it may be the excuse traders are looking for to go "risk-off," as all the kids are saying these days, according to Brown Brothers Harriman.

"While the S&P and Moody's downgrades have been so well telegraphed, the fallout should be limited," the firm said on Monday. "However, this risk rally looks ripe for a deeper correction, and so perhaps this is the news that will trigger it."

Brown Brothers said the lowering of the outlook for the U.K. was the biggest surprise in Moody's call, but the firm doesn't think losing triple A status is all that big a deal anymore, noting that "U.S. and euro zone borrowing costs are lower now than before the downgrades by S&P."

"We stress again that the loss of AAA is not the end of the world, and one could make the case that AA is indeed the new AAA," the firm said. "However, the Moody's news comes a time when markets are nervous about Greece, and so some limited fallout to the euro and EM FX emerging markets forex appears likely near-term. The fallout for GBP may be longer-lasting, since it was expected by most to retain its AAA rating."

And finally, if you've read this far, Happy Valentine's Day!

-- Written by Michael Baron in New York.

>To contact the writer of this article, click here: Michael Baron.
Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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