Thus far, the stock market has behaved rather reasonably. We saw major gains in the first quarter followed by profit-taking. The correction while painful takes some of the froth from equity prices.
This action comes on the heels of a similar pattern in 2011. The common thread between the two years is corporate profit growth. While stocks tread water, earnings have been relatively strong.
In other words, valuations as defined by multiples of profits have come down over the last two years. It makes for a compelling case to own stocks at this current moment in time until one takes a closer look at the bond market.
Bond traders are telling us that the world is once again on the precipice. How can we reconcile the two fairly diametrically opposed views?
Stock traders have a right to be nervous. The last time we saw this sort of divergence was in 2008. The bond market was right with its view then and stocks ultimately lost some 40% of their value before the 2008 year was out.
This is no 2008. Yes, problems with debt in eurozone countries is disconcerting, but keep in mind that one of the biggest triggers for stocks to collapse were asset prices that had reached unsustainable levels. The resulting loss in asset value is what led to stocks losing so much in 2008.
Different this time around
In my humble opinion, this go-around is different as evidenced by the staying power of corporate profits and the lack of any sort of real bubble (unless you count gold, which is a whole different story). As such, I simply do not see any real predictable trigger for a market collapse.
I think stocks ultimately hang in there, making for fertile ground for trading stocks releasing earnings. Last week’s Stone-Cold Earnings Trade Lock of the Week, Kroger, was a 100%-plus winner. Every single week those playing the earnings game can find similar winners.
Forget about the macro nonsense and long-term gyrations of your portfolio. Make money playing the earnings trading game.
This week’s Stone-Cold Earnings Trade Lock of the Week is a potential grand slam. If correct, this trade could double or triple in value or more in the day of trading after earnings are released. Shares of this company have been beaten down so badly irrespective of earnings performance a sharp reversal is long overdue. The company is expected to grow profits at a double-digit clip and yet shares trade for a single-digit multiple of expected earnings.
When this company reports, it usually beats expectations. If that trend continues, I sense another 600% gainer on the way similar to what we saw recently with the explosion at ValueClick.
It may be the slow period of earnings, but there are still plenty of stocks to look at. Here are five companies to look at, including this week’s Stone-Cold Earnings Trade Lock of the Week: