PowerTrend Brief: More Important Than Buying a Stock, Knowing When To Say No

The gauntlet is upon us.

During the last few weeks, we’ve once again entered the earnings zone. To say this week will be busy is an understatement. All told, more than 1,100 companies will report their quarterly results this week and generate more than 750 webcasts that will be available for both individual and institutional investors.

The corporate earnings gauntlet could hit the stock market like a lamb or like a hammer. Given what we’ve already seen this earnings season — more companies beating on the bottom line, but missing the top line better known as revenue — expectations are weakening compared to recent quarters. That situation has weighed on the stock market and led to a pullback of more than 2% last week for each of the major indices and more than 2.3%, on average, since the recent market peak of April 11.

I’d point out that the Nasdaq had a rougher time last week — down 2.7% — due to renewed concerns about Apple (AAPL) following the negative pre-announcement by key supplier Cirrus Logic (CRUS). Despite its fall in the last several months, Apple continues to account for roughly 9.3% of the Nasdaq Composite Index, according to Morningstar. Also weighing on the Nasdaq are Intel (INTC) and Dell (DELL), which are falling victim to the shift in consumer preference to smartphones and tablets and away from PCs. Subscribers to my investment newsletter are rather familiar with this shift as part of my Always On, Always Connected PowerTrend.

In the May issue of PowerTrend Profits, I wrote about how I would find it very difficult to recommend a PC manufacturer like Dell or Hewlett Packard (HPQ), no matter how cheap some pundits describe the shares. As I have learned, stocks tend to be cheap for a reason. That said, I will admit that I did read through the 247-page brief that Dell filed with the Securities and Exchange Commission several week ago. That filing painted a very dire picture of a company that missed not only Wall Street expectations but also its own internal revenue projections over the last several quarters.

One of my biggest criticisms of Dell has been its lack of exposure to mobile. Dell was not alone in missing the smartphone wave — we can count Hewlett-Packard in that camp as well. Unlike Hewlett-Packard, however, Dell is also missing out on the tablet boom that is cannibalizing its notebook PC business. Also hitting Dell and Hewlett-Packard are the new Google (GOOG) Chromebooks from Samsung, Acer and others. Since these devices have price points between $200 and $350, modest adoption and market-share gains from tablets will put even more pressure on Dell’s PC business.

A shrinking end market and weakening competitive position are not the place that I want my subscribers to be — it’s a recipe for falling earnings and dropping stock prices. To that I say no thanks!

The reason I pointed that out to you is that it’s just as important to know when to say “no” to a stock rather than trying to find a reason to try and like it no matter how cheap it might be. That’s especially the case when we get hit with a tidal wave of information that will come crashing down on us in the coming five days and, particularly, on Thursday. On that day alone, more than 400 companies will be reporting their quarterly earnings. Among them will be some heavyweights like Amazon.com (AMZN), Bristol Myers (BMY), Colgate Palmolive (CL), Dow Chemical (DOW), The Hershey Company (HSY), Starbucks (SBUX), United Parcel (UPS) and Exxon Mobil (XON), to name just a handful of companies.

By knowing which companies and related industries are out of favor, we not only can sidestep and avoid questionable investments but we also can focus on key companies and the PowerTrends that drive their business. An example of this situation is that amid the 1,100 companies reporting their earnings this week, there are 11 that will prove insightful not only on the status of the smartphone and tablet markets, but also on where mobile is headed next.

That’s one of the things I’ll be listening to this week.

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To read my e-letter from last week, please click here. I also invite you to comment about my column in the space provided below.

Sincerely,

Chris Versace

Editor, ETF PowerTrader

Editor, PowerTrend Profits

Host, PowerTalk