3 Earnings Beats — And What It Means For Stocks Still To Report

| April 27, 2018

A look forward into earnings season requires a rearview mirror

Earnings season is easily the most exciting time for stock market investors. Companies report their quarterly numbers, and give investors new information to digest. Investors digest that information, and then react accordingly by either buying or selling the accompanying stock.

As such, there is a ton of a volatility in earnings season. Stocks can jump 20% higher in a day. They could also drop 20% in a day.

Because of this volatility, predicting earnings outcomes is something that some investors love to do. They look at all the data, and try to understand whether or not Stock X will beat earnings estimates. If so, they buy. If not, they sell.

What is perhaps the most important data in that analysis? Looking at peer companies who have already reported. If Stock X and Stock Y are in the same industry, and Stock Y already reported really good numbers, chances are that Stock X could report equally great numbers.

Thus, a look forward into earnings season requires a rearview mirror. Below is a list of 3 stocks that smashed first quarter earnings estimates, and an explanation of what those big beats mean for the stocks that report after them.

Earnings Season Winners #1: Netflix (NFLX)

Tech giant Netflix, Inc. (NASDAQ:NFLX) kicked earnings season off with a bang by reporting yet another dazzling quarter. The company topped expectations on every key metric from subscriber growth to margin expansion, and NFLX stock soared.

This report is substantial for multiple reasons.

First, it shows that the NFLX secular growth story remains in-tact. The company continues to march towards world domination of the entertainment industry through offering an over-the-top video service that beats traditional video services on both price and convenience.

Consequently, the internet television shift continues to sweep the globe at a rapid pace. Companies with a big internet television component, like AT&T Inc. (NYSE:T), DISH Network Corp (NASDAQ:DISH), Walt Disney Co (NYSE:DIS) and Facebook, Inc. (NASDAQ:FB), should report strong numbers from their internet television businesses. In the case of T, DISH, and DIS, though, that internet TV strength will likely be offset by weakness in the traditional TV segments.

Second, Netflix’s strong report is a great sign for big tech names. Big tech names like Netflix, Facebook, Amazon.com, Inc. (NASDAQ:AMZN), NVIDIA Corporation (NASDAQ:NVDA) and Tesla Inc (NASDAQ:TSLA) were reeling before earnings season.

But the NFLX report shows that there is nothing wrong with the big tech growth narrative. If anything, it’s only getting better. Adoption of new technology is currently happening at an unprecedented pace, and that means good things for new tech companies like Amazon, NVIDIA, and Facebook this earnings season.

Third, the NFLX report did show that valuations on the hyper-growth group aren’t over-extended just yet. The biggest knock against the hyper-growth group — NFLX, AMZN, NVDA, TSLA, Shopify Inc (NYSE:SHOP) and others — was valuation. But NFLX, one of the richer valued stocks in that group, soared on strong numbers.

Thus, the names in that hyper-growth group could roar higher if the numbers are good.

Overall, then, I see the NFLX report as bearing bullish signs for FB, AMZN, NVDA, SHOP, and DIS this earnings season.

Earnings Season Winners #2: Restoration Hardware (RH)

One stock that flew even higher than NFLX after its earnings report was high-end furniture retailer Restoration Hardware Holdings, Inc (NYSE:RH). The company delivered strong Q4 numbers alongside a healthy guide, and RH stock rose more than 20% as a result.

This report has big implications for the commerce world, specifically the furniture commerce world.

First, it shows that brick-and-mortar retail is not dead for high-end furniture retailers. Some investors were worried that Amazon and Wayfair Inc (NYSE:W) were eating the lion’s share of the furniture retailer market. While that may be true at lower price points — Pier 1 Imports Inc (NYSE:PIR) reported ugly quarterly numbers and its stock sank — it is certainly not true at higher price points.

Second, it shows that demand for home goods and furnishings in general remains robust. This corroborates U.S. retail sales data from the Census Bureau, which shows that home furnishing sales are up 4.5% year-over-year over the past 3 months, while building material sales are up 5%.

Clearly, the consumer backdrop for home remodeling and home furnishing is quite strong. Thus, stocks with a ton of exposure to those markets should do quite well this earnings season. That includes companies like Home Depot Inc (NYSE:HD), Lowe’s Companies, Inc. (NYSE:LOW), and Costco Wholesale Corporation (NASDAQ:COST).

Overall, then, I see the RH report as bearing bullish signs for HD, LOW, and COST this earnings season.

Earnings Season Winners #3: Movado Group, Inc (MOV)

One of the biggest earnings surprises this earnings season was watch-maker Movado Group, Inc (NYSE:MOV). The left-for-dead retailer reported much better than expected fourth quarter numbers while also delivering a healthy guide for next year. MOV stock jumped 15% higher in response.

This report has two huge implications for the retail world: demand for traditional watches isn’t dead, and traditional watch-makers are also successfully ramping up their smartwatch efforts.

Movado’s results aren’t an isolated incident. Fellow watch-maker Fossil Group Inc (NASDAQ:FOSL) reported much better than expected quarterly numbers a few months back, and that stock took off like a rocket ship. The theme across these two watch-makers seems to be the same. Demand erosion for traditional FOSL and MOV watches is slowing, while demand ramp for FOSL and MOV smartwatches is accelerating.

That is fantastic news for everyone not named Apple Inc. (NASDAQ:AAPL) in the watch market. It is particularly good news for fashion brands that are jumping into the smartwatch game. There is clearly robust and growing demand for watches that are designed in the overlap of technology and fashion.

Brands with big exposure to this market include Movado, Fossil, Michael Kors Holdings Ltd (NYSE:KORS), and Garmin Ltd. (NASDAQ:GRMN).

Overall, then, I see the MOV report as bearing bullish signs for FOSL, KORS, and GRMN this earnings season.

As of this writing, Luke Lango was long DIS, FB, AMZN, SHOP, PIR, HD, LOW, COST, AAPL, and FOSL. 

 

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