Alcoa and 'Too Big to Fail' Banks Key Next Week's Earnings

NEW YORK (TheStreet) -- Second quarter earnings season begins with Alcoa (AA) after the close on Monday, putting the focus on the basic materials sector.

On Wednesday we shift to the retail-wholesale sector with earnings from Family Dollar ( FDO) pre-market, and Yum! Brands ( YUM) after the close.

On Thursday and Friday the focus becomes the finance sector with two regional banks on Thursday and two of the four 'too big to fail" money center banks pre-market on Friday.

The fundamental backdrop for the second quarter earnings season is that stocks continue to trade under a ValuEngine valuation warning with 69.1% of all stocks overvalued and with 33.0% overvalued by 20% or more. The basic materials sector is undervalued by 13.4% with the retail-wholesale sector 22.2% overvalued, and the finance sector 18.0% overvalued.

Reading the Table

OV/UN Valued: Stocks with a red number are undervalued by this percentage. Those with a black number are overvalued by that percentage according to ValuEngine.

VE Rating: A "1-engine" rating is a strong sell, a "2-engine" rating is a sell, a "3-engine" rating is a hold, a "4-engine" rating is a buy and a "5-engine" rating is a strong buy.

Last 12-Month Return (%): Stocks with a red number declined by that percentage over the last 12 months. Stocks with a black number increased by that percentage.

Forecast 1-Year Return: Stocks with a red number are projected to decline by that percentage over the next 12 months. Stocks with a black number in the table are projected to move higher by that percentage over the next 12 months.

Value Level: Price at which to enter a GTC limit order to buy on weakness. The letters mean; W-weekly, M-monthly, Q-quarterly, S-semiannual and A-annual.

Pivot: A level between a value level and risky level that should be a magnet during the time frame noted.

Risky Level: Price at which to enter a GTC limit order to sell on strength.

Alcoa ($7.71) set a new multi-year low at $7.63 on Wednesday as EPS estimates were cut by a penny to 9 cents per share. My annual value level is $5.23 with a weekly pivot at $7.90 and monthly risky level at $8.23.

Family Dollar ($63.32) appears to have established a trading range from $65.82 on May 15 down to $59.30 on June 4. My monthly value level is $57.38 with the 200-day SMA at $62.39, a weekly pivot at $62.99 and quarterly risky level at $70.03.

Yum! Brands ($71.12) appears to have established a trading range from $73.89 on June 10 down to $67.06 on June 24 versus the 200-day SMA at $68.25. My monthly value level is $65.53 with a weekly pivot at $71.04 and semiannual risky level at $73.12. Keep in mind that business at Kentucky Fried Chicken in China has been hurt by quality control issues.

When reviewing the earnings reports from regional and community banks, note that the FDIC in presenting its Quarterly Banking Profile for Q1 2013 cautioned that net interest income has narrowed and that growth in loan demand remains slow. In addition, the recent sharp rise in U.S. Treasury yields is a potential drag on earnings for banks that face mark-to-market issues on securities held for trading versus those held to maturity.

Commerce Bancshares ( CBSH) ($44.07) set a multi-year high at $45.18 on Wednesday as EPS estimates were raised a penny to 72 cents a share. My monthly value level is $41.48 with a semiannual risky level at $47.20.

Bank of the Ozarks ( OZRK) ($44.59) set its 2013 high at $45.70 on May 22. My semiannual value level is $41.09 with an annual pivot at $43.44 and monthly risky level at $46.27.

When evaluating the earnings reports from any of the four 'too big to fail' banks remember that their balance sheets are so huge that accounting flexibility will usually result in an earnings beat.

JP Morgan Chase ( JPM) ($52.77) set a multi-year high at $55.90 on May 30 then as low as $50.11 on June 24. My semiannual value level is $50.37 with a monthly risky level at $55.58.

Wells Fargo ( WFC) ($41.22) set a multi-year high at $41.96 on July 1 after testing $39.40 on June 24. My semiannual value level at $40.04 with a weekly risky level at $43.06.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Richard Suttmeier has an engineering degree from Georgia Tech and a master of science from Brooklyn Poly. He began his career in the financial services industry in 1972 trading U.S. Treasury securities in the primary dealer community. In 1981 he formed the Government Bond Department at LF Rothschild and helped establish that firm as a primary dealer in 1986. Richard began writing market research in 1984 and held positions as market strategist at firms such as Smith Barney, William R Hough, Joseph Stevens, and Rightside Advisors. He joined www.ValuEngine.com in 2008 producing newsletters covering the U.S. capital markets, and a universe of more than 7,000 stocks. Richard employs a "buy and trade" investment strategy and can be reached at RSuttmeier@Gmail.com.

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