Can You Still Profit With These Forgotten Giants? + Vic Wisemann’s Thoughts on: CAL, AMR, TYC, BBI, A, HPQ, NFLX, COV, TEL
 InvestorsObserver Featured Contributor Vic Wisemann |
All eyes are on corporate earnings these days as investors shift from a hopeful mode to one more demanding of real improvement. And in the business headlines, at least, they are seeing it. The overall picture for the third quarter is very similar to the second quarter, with most firms beating expectations while revenues and profits are still lower than a year ago.
As third-quarter earnings roll in, analysts are slashing prior estimates, predicting many dire months ahead for major American companies. Just 55 of the S&P 500 companies have seen estimates of their likely earnings in the fourth quarter revised upward, while 424 companies are facing declines. The result are earnings which are going over a cliff. Estimates were way too high, given the soft economy, and analysts are diligently thumping them with an axe.
The bottom line is that analysts now expect the fourth quarter to be much tougher on corporate America than they did just a month ago. Part of this new burst of cynicism is coming from the brutally candid earnings that guidance companies have been providing lately. What management is saying on these conference calls is basically 'The end is not here yet.'
Corporate fear stems in part from sliding consumer confidence, which recently hit its lowest point ever recorded. Consumers have been impacted by a serious downturn in every form of wealth and income that supports consumer spending, and battered by high levels of volatility in their stock accounts. The diminished value of stocks, falling home prices and fears about potential unemployment combine to create a negative effect, making consumers feel poorer. As a result, they spend less.
Read on to see what former market driver could still move profits into your portfolio.
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Some sectors are getting hit harder than others. At the beginning of October, analysts were expecting the materials sector, which includes big mining and steel companies, to be up 29% for the fourth quarter. But that collective estimate is now -12%, a nosedive resulting at least in part from tanking commodity values.
Analysts feel that earnings weakness is spreading beyond the financials and consumer discretionary sectors, which includes industries like retailing and travel, into other sectors like energy and industrials. Among the few companies that have been able to buck the negative trend in analyst expectations are airlines like Continental Airlines (CAL) and AMR Corporation (AMR), which have benefited from falling fuel costs.
Looking at the companies driving the market this earnings season, I am reminded of years past and was wondering whatever became of some of the market-moving stocks of the past. Companies like Tyco International (TYC), Blockbuster Inc. (BBI) and Agilent Technologies Inc. (A).
Agilent was a spin-off of Hewlett-Packard (HPQ) and broke records in 1999 as the largest initial public offering (IPO) in Silicon Valley history. Agilent is now a fully independent company focusing on high-growth markets in communications, electronics and life sciences. The company has continued to make improvements in products with lower costs. Over the years, however, the company has lost its market moving power as it quietly goes about its profitable operations.
Blockbuster was once a heavyweight in the home entertainment industry. The company had one of the strongest and most recognizable entertainment brands in the world and reported worldwide revenues of more than $5 billion in 2008.
Blockbuster's stores became omnipresent neighborhood features attracting over 50 million customers annually. The stores are open 365 days a year and offer merchandise selections, quantity and formats customized at the store level to meet the needs and preferences of local customers. However, the company was late getting into the movie-by-mail business currently dominated by Netflix (NFLX).
Tyco Inc. was once one of the heavyweights in the market. In 2006 the Tyco Board of Directors approved a plan to separate the company’s portfolio of businesses into three separate, publicly-traded companies: Covidien (COV), Tyco Electronics (TEL) and Tyco International (TYC).
In 2007 the company completed the separation into three independent companies. The new Tyco International is composed of five business segments: ADT Worldwide, Fire Protection Services, Safety Products, Flow Control and Electrical & Metal Products. The overall analysis of the fundamental factors for TYC reveals that the company needs to work to improve its financial performance. This shows up in the large number of negative fundamental comments.
TYC faces a very challenging business environment, but government stimulus actions could allow the global economy to bottom over the coming year. Current management team appears to be making solid operating decisions, but is still repairing an inefficient business model put together by Tyco's former executive team.
For a hedged trade on TYC you may want to consider the 30/26 call debit spread for a 3.60 debit. This works out to be an 11.1% return and the stock would have to fall over 12% to cause a problem.
These are electrifying times in the market and you need to be confident in the trades you make. Be sure you understand the exposure of a trade before you put your money at risk. Don't risk money on trades that don't fit your personal goals and tolerances. Track them and if you find yourself comfortable with paper trading the strategy, then you can look for other opportunities. Do your homework, understand the trade, and have a little fun.
If you have any additional thoughts, ideas or plays on former sector leaders, please e-mail me at vwisemann@InvestorsObserver.com.
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