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Taking It Easy Before Earnings

·7 min read
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With a fresh earnings season about to begin, stocks took a small step back from record highs on Monday as trading volume remains muted.

The S&P ended three straight sessions of all time highs today, but it was only off by 0.02% to 4127.99. The Dow declined 0.16% (or about 55 points) to 33,745.40. Both of these indices established record highs last Friday. The NASDAQ slipped 0.36% (or about 50 points) to 13,850.

One of the stocks going against the malaise today was graphics chip pioneer NVIDIA (NVDA), which jumped more than 5.6% after announcing its first CPU and an encouraging revenue outlook. Other big news on Monday was Microsoft (MSFT) making its second-biggest acquisition ever by picking up AI & speech technology company Nuance Communications (NUAN) for nearly $20 billion in an all-cash transaction. MSFT was only up 0.02%, but NUAN soared nearly 16%.

But overall it was another quiet session. The slow trade we’ve been seeing for the past several sessions continued, though it didn’t keep the indices from securing solid performances last week. The NASDAQ jumped 3.1% in the previous five sessions, while the S&P was up 2.7% and the Dow increased 2%.

Now it’s finally time to start earnings season. Investors are feeling pretty good after the recent jobs report and really appreciate Fed Chair Powell’s continued promises of super accommodation. And this feeling of optimism includes expectations for the first quarter.

As Sheraz Mian said in his recent article titled “Looking Ahead to Big Banks’ Q1 Earnings”; he sees earnings growth of 20.4% for the quarter and revenue growth of 5.6%.

The season, unofficially, gets started on Wednesday, when JPMorgan (JPM) goes to the plate, along with Wells Fargo (WFC) and Goldman Sachs (GS). Other major financial names will be reporting in the following two days before earnings season really picks up the pace next week.

Today's Portfolio Highlights:

Technology Innovators: It’s always fun when one of your portfolio positions becomes profitable, because Wall Street will suddenly pay it a lot more attention. That’s why Brian added Upwork (UPWK) on Monday. This provider of online recruitment services topped the Zacks Consensus Estimate in the past two quarters. Most importantly though, the recent beat was a penny profit that topped expectations by nearly 115%. Rising earnings estimates for this year and next made UPWK a Zacks Rank #2 (Buy). Estimates for 2021 are still at a loss, but it has narrowed significantly in the past several weeks. The editor was most encouraged by expectations for topline growth of 25% this year and more than 22% for next. Read the full write-up for a lot more on this new addition, including an overview of all positions in the portfolio. By the way, this service had a couple of the biggest performances on Monday with Criteo S.A. (CRTO, +4.5%) and Tesla (TSLA, +3.7%).

Surprise Trader: Usually Dave doesn’t like buying huge household names for this portfolio, since smaller-cap stocks have more room to run. But he’s making an exception for Goldman Sachs (GS)... and it’s easy to see why. The financial powerhouse is a Zacks Rank #1 (Strong Buy) that’s part of a space (Financial – Investment Bank) in the top 2% of the Zacks Industry Rank. It has a VGM Composite Score of “A”, as well. In addition to this trifecta, GS also has a positive Earnings ESP of 3.83% for the quarterly report scheduled before the bell on Wednesday, April 14. The editor added GS on Monday with a 12.5% allocation, while also selling the rest of Rent-A-Center (RCII) for a 12.5% return in under six weeks. See the complete commentary for more.

Income Investor: You might think that a pharma giant like AbbVie (ABBV) doesn’t have many opportunities for significant growth... but Maddy begs to differ. The company’s Humira arthritis drug continues finding new revenue flows, while there are promising drugs in the pipeline like Rinvoq and Skyrizi. However, the editor was most impressed with its “enticing” yield of 4.8% and a valuation that’s “too cheap to ignore”. Maddy added ABBV on Monday and sold Johnson & Johnson (JNJ) for 14.5%. JNJ is still a great name, but it doesn’t have as “juicy” of a dividend. See the full write-up for more.

Options Trader: April options expire this Friday, so Kevin made several moves on Monday to give a few positions more time. First of all, the portfolio sold to close the April 100.00 Call in Yum! (YUM) for a 135.6% return. Having doubled the premium as planned, the editor bought to open an October 115.00 Call. He also sold to close April options in SS&C (SSNC) and Arthur J. Gallagher (AJG) for losses, but is giving them more opportunities by buying to open October Calls for each. Finally Lennox (LII) doesn’t have to worry about an impending expiration since it has a June Call, but the premium has doubled. Therefore, Kevin sold to close that June 310.00 Call for a 153.7% return and reinvested by buying to open a September 360.00 Call. Read the full write-up for specifics on all of today’s moves.

Black Box Trader: The portfolio cashed in a huge winner as part of this week's adjustment, which included three changes in total and two double-digit profits. The stocks that were sold today included:

• Abercrombie & Fitch (ANF, +54.3%)
• Timken Steel (TMST, +12%)
• Santander Consumer USA (SC, +8.6%)

The new buys that replaced these names were:

• ConocoPhillips (COP)
• Dow (DOW)
• ExxonMobil (XOM)

Read the Black Box Trader’s Guide to learn more about this computer-driven service.

Headline Trader: "There is an extreme amount of optimism baked into this market right now, and this week we will begin to find out if the market's euphoric valuations are justified. I have no doubt that we will get mixed results between sectors with disappointments and elation being balanced through the next month of quarterly results, either confirming optimistic price action or catalyzing a correction in the seemingly stretched markets.

"There is so much positivity in the equity markets today that it makes me nervous. The primary thing to focus on during this upcoming earnings season is going to be forward guidance. Many companies will likely continue to abstain from providing this because of the still-elevated levels of uncertainty in the economy. When it is provided, I suspect it will be market moving for those stocks.

"Earnings beats are expected as a bare minimum, with market euphoria peaking going into Q1 earnings. Any misses could be devastating for share prices. A beat may not even be enough, with investors & traders ready to pull the sell trigger at the first sign of weakness at these stretched levels. Don't be surprised if you see some profit-pulling on earnings beats, especially from this week's financial reports, with the big banks having had a glorious rally over the past 6 months."
-- Dan Laboe

Until Tomorrow,
Jim Giaquinto

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