Earnings Season Starts with a Bang

• Ian Wyatt
• On 2:30 pm EDT, Thursday October 8, 2009

Today looks like an easy one: solid earnings from Alcoa (NYSE:AA - News) + lower than expected initial jobless claims = higher stock prices.

We've seen the initial jobless claims vary quite a bit lately. Some weeks they have been worse than expected, some weeks better. As I've said, this is to be expected as the US economy puts in a floor.

Now, most economists expect unemployment to stay on the floor a lot longer than other recessionary conditions. And this is going to be a drag on GDP. But unemployment isn't necessarily a drag on all corporate earnings. In fact, we've already seen job cuts help some companies boost their profitability. And there are sectors where the drop in consumer spending will have only a minimal impact.

Technology, pharmaceuticals and biotech, gold, energy, and even some retail stocks should be relatively immune to the effects of unemployment.

*****I've advocated avoiding financials, housing and most retail stocks. But retail is starting to show better than expected same store sales numbers. And yesterday Talbot's (NYSE:TLB) received an upgrade, and subsequently jumped 13%.

*****Earnings season is off to a good start. Alcoa reported a profit that beat analyst expectations and the company even went so far as to say that demand for aluminum will rise 11% by year's end.

Alcoa also reported that it saved nearly $2 billion in the quarter on overhead and procurement costs while revenue was up 9% from the previous quarter. It's pretty easy to see that Alcoa's $77 million profit was still largely the result of cost-cutting measures.

I'm sure the bears will point out that revenues simply aren't growing as much as they should. But that's not really the point. Businesses need to adjust for economic conditions. And they've done that. Alcoa's results suggest the company is getting lean and mean. And when growth does return, profits will expand exponentially.

*****Briefing.com reports that analyst estimates for 2010 corporate earnings has risen 2.8% since the end of May, and that the S&P 500 has advanced 11.5% in the same period, and currently has a forward P/E for the next 4 quarters of 15.

The lagging number here is clearly earnings estimates. If the S&P 500 had to rise 11.5% to make forward earnings estimates yield a P/E of 15, it suggests that earnings estimates and stock prices were too low during the depths of the recession. And if companies follow Alcoa and continue to beat expectations, it would seem obvious that the forward P/E is actually lower than 15 and that there is more upside for stocks. I still think Dow 10,500 is coming this year.

*****Of course, we tend to focus on the biggest stocks when talking about the economy and the stock market. But it's the smallest stocks that will perform best in a rising market.

I just released my latest Special Report to SmallCapInvestor PRO members. It's called The 10 Most Profitable Small Cap Stocks for 2010 and it's probably the best Special Report I've ever done. The stocks in it are that good. In fact, I added 3 of them to the SmallCapInvestor PRO portfolio last week to bring the total to 5. One of the stocks we just bought is up 21% in a week!

If you're interested, you can get your copy of The 10 Most Profitable Small Cap Stocks for 2010 HERE.

Ian Wyatt is the Chief Investment Strategist of SmallCapInvestor PRO (http://pro.smallcapinvestor.com) and author of the book, "The Small-Cap Investor: Secrets to Winning Big with Small-Cap Stocks." You can learn more about his book at http://www.smallcapbook.com.

Buzz up!