The light can at any time go from green to red without pausing at yellow.
This quote comes from the Oracle of Omaha, Warren Buffett, himself. It’s also an apt description for what the NASDAQ is experiencing right now. After a phenomenal 2021, which saw the tech-heavy index surge 21.4% for the year, putting in right behind the S&P 500’s 27% gain and outpacing the Dow’s 19% return during the same time period, the index came to a grinding halt last week and has continued to march lower this week.
As you may recall, last Wednesday, the NASDAQ officially slipped into correction territory, off 10.7% from its all-time high set on November 19. According to Sundial Capital Research chief research officer Jason Goepfert, nearly 40% of NASDAQ companies have fallen at least 50% from their 52-week highs. Investors haven’t seen this severe of a tech selloff since the dot-com bubble burst in 1999-2000.
This week hasn’t been any better for the NASDAQ. Yesterday, the tech-heavy index opened 2% lower, though it did make an incredible reversal in the afternoon and managed to eke out a small gain by the close. Today was also an ugly day for the index, as it slipped more than 3% in the afternoon.
While I know the continued selling has been gut-wrenching, I’m actually happy at this moment, and that’s probably baffling to most folks.
First let me say that we had an incredible reversal yesterday, with very strong volume to the upside. This tells me that the smart money on the sidelines is jumping back in and buying stocks. But every time you make a low, you have to retest the lows, and you want the retest to be on lighter volume and eventually exhaust the selling volume. So, when you have a violent move like we had yesterday, it’s going to take some time for all the dust to settle.
We’re also moving deeper into the fourth-quarter earnings season, and it’s clear that Wall Street is refocusing on fundamentals. In fact, The Wall Street Journal noted just today that investors are losing interest in companies that aren’t profitable. This is good news for me, as I only recommend fundamentally superior companies that can post strong sales and earnings in a decelerating earnings environment.
I’m pleased to say that, so far, earnings are working. Last Wednesday, Alcoa Corporation (AA) announced that it achieved record results for its fiscal year 2021. For the fourth quarter, Alcoa reported its highest quarterly revenue in three years. Fourth-quarter revenue jumped 39.6% year-over-year to $3.34 billion, up from $2.93 billion in the same quarter a year ago. Analysts were expecting revenue of $3.36 billion. Fourth-quarter adjusted earnings surged 861.5% year-over-year to $2.50 per share, compared to $0.26 per share in the fourth quarter of 2020. Analysts were looking for adjusted earnings of $1.96 per share, so Alcoa posted a 27.6% earnings surprise.
The stock rallied in the wake of its stunning earnings results, though it did get hit with profit-taking later in the week. However, it bounced back nicely today, climbing more than 5% while the broader market pulled back.
An example from today is Lockheed Martin Corporation (LMT). This company crushed analysts’ earnings expectations and posted in-line revenue for both its fourth quarter and full year 2021. For the fourth quarter, the defense contractor achieved earnings of $2.0 billion, or $7.47 per share, on $17.7 billion in revenue, which compares to earnings of $1.8 billion, or $6.38 per share, and revenue of $17 billion in the same quarter a year ago. Analysts were expecting earnings of $7.15 per share on $17.66 billion in revenue.
During fiscal year 2021, revenue rose 2.5% year-over-year to $67.04 billion and slipped 6.3% year-over-year to $22.76 per share. The consensus estimate called for full-year earnings of $22.46 per share and revenue of $67 billion. Lockheed Martin also noted that it rewarded shareholders with $7.0 billion in the form of dividends and stock buybacks. Investors cheered the strong results, triggering a 3% pop in the stock this afternoon.
Now, I should add that we’ll hear from three flagship stocks this week: Up first is Microsoft Corporation (MSFT) this afternoon, followed by Tesla (TSLA) on Wednesday and Apple (AAPL) on Thursday. Their results are important, because these companies are bellwethers, and we need a bellwether to grab the market by the horns and lead us. Last year, half of NASDAQ’s returns came from Apple, Microsoft, Alphabet (GOOG), NVIDIA Corporation (NVDA) and Tesla. So, we’re looking for the new leaders to emerge here, and it’s imperative that that happens.
So, what are analysts expecting from Microsoft’s, Tesla’s and Apple’s latest quarterly reports?
- For Microsoft’s second quarter in fiscal year 2021, analysts expect earnings to rise 13.79% year-over-year to $2.31 per share, up from $2.03 per share in last year’s second quarter. Revenue is expected to increase 18% year-over-year to $50.88 billion. Earnings estimates have been revised 4.1% higher in the past three months, so an earnings surprise is possible.
- For Tesla’s fourth quarter, the analyst community is calling for earnings per share to surge 182.5% year-over-year to $2.26, up from earnings per share of $0.80 in the same quarter a year ago. Revenue is expected to climb 52.2% year-over-year to $16.35 billion, up from revenue of $10.74 billion in the same quarter a year ago. Analysts have revised their earnings estimates 18.3% higher in the past 90 days, so an earnings surprise could be in the offing.
- For Apple’s first quarter in fiscal year 2021, analysts expect earnings to increase 11.9% year-over-year to $1.88 per share, up from earnings of $1.68 per share in the same quarter last year. Revenue is expected to come in at $118.38 billion. Earnings estimates have been upped slightly in the past three months.
We’ll have a better understanding of where these companies stand after their results are out (I’ll review their latest numbers in Saturday’s Market360 article, so keep an eye out for that), but I can already tell you that regardless of where the market turns next, the best strategy is to invest in fundamentally superior stocks. In my 40-plus years of investing, I’ve found that earnings work 70% of the time and that good stocks bounce like “fresh tennis balls” while bad stocks bounce “like rocks.” I don’t expect this earnings season to be any different.
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The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owns the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below:
Alcoa Corporation (AA), Alphabet (GOOG), Lockheed Martin Corporation (LMT), NVIDIA Corporation (NVDA)