Executive Analysis"The global economy was weaker than we'd expected." This is the classic table setting for the full-year earnings warning. As that sweet nothing rolls from their tongues, this is where my head will be.
- "Global economy" does not mean only the U.S., Europe and China. It also includes emerging markets such as India and Brazil -- and, in India, April-to-June growth in India came in at 5.5%, the worst performance in a decade. Meanwhile, Brazil's central bank recently reduced its 2012 growth estimate by a full percentage point.
- How the "global economic weakness" impacts higher-margin business segments will be vital in offsetting softer growth in more established, less profitable businesses.
- "Inventory destocking" is one phrase that has often sent chills down my spine. It's a phenomenon that signals customer hesitancy is unlikely to abate in a single quarter, and it usually says reordering is not as robust as the market has been pricing into the company's valuation.
- I'm on a constant hunt for "hype words" designed to deflect attention from the earnings warning and limp operating performance. Examples include: "outstanding," "stellar," "record," "best ever" and "robust."
Actual Earnings WarningYou will want to watch the depth of the full-year earnings shortfall. By depth, I mean two things: (1) how far the slashing was relative to prior expectations; and (2) how far the reduction was vs. consensus. Massive depth would be a negative surprise, and I would lean toward avoiding that stock on the probable pullback, as this indicates unstable fundamentals. But if the depth is somewhat near Street expectations, and there are pockets of the business wherein profits continue to grow faster than sales -- and the stock is reined in -- that is where opportunities will emerge.
The Bucket Shop Rumor Mill
- I fully anticipate Bill Ackman to defend JCPenney (JCP) 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), the Value Investor Conference is likely where he will show his hand.