Earnings Start With a Bang

Alcoa (AA) got earnings season started with a bang last night. The aluminum company reported earnings excluding special items of $0.18 a share compared to just $0.07 last year. The aluminum companies blew away the Streets estimate of $0.12 and also exceeded revenue expectations. Total revenues were $5.8 billion ahead of the $5.7 billion estimate so it is a double beat for Alcoa. It was a fantastic quarter with all of Alcoas operating segments showing profitable results in the quarter

Lots of market pundits are calling for a pullback in stock prices this summer. I suppose it can happen as we have had a pretty strong market since April but if it does it will not last very long. The combination of strong earnings, high levels of stock buybacks is just to potent a mix for the bears to overcome right now. The economy is getting stronger here at home and around the world and that should keep stocks moving higher. The Global PMI numbers released yesterday showed continued improvement around the world with even beleaguered Italy showing the best increase in 39 months. I think there are too many positive factors right now for stocks prices to move substantially lower or a sustain weakness for long.

I find sometimes it helps to ignore all the noise and just look at what is really going on in the stock market. When I load all 500 stocks in the S&P Index into Portfolio Grader I see that the combined market is rated hold. If you own the index there no rush to sell what you have but buying the whole market is a lukewarm idea at best.

When I look at the rankings I see that there are 34 stocks rated String buy right now, 140 stocks are rated buy and 173 stocks carry a hold rating. On the downside 132 issues are rated sell and 21 are the “avoid at all costs” stocks that have a strong sell rating form our stock picking tool. Investors with new money to put to work should be focusing entirely on those 174 stocks that have a buy or strong buy rating. I have said all year that the stock market advance would begin to thin out as we moved higher and Portfolio Grader shows that this indeed the case.

Investors with new money to invest that want to go into earnings season locked and loaded with the very best stocks that can lead the index higher should focus their efforts on those stocks that carry a strong buy rating. These are the stocks with the powerful revenue and profits growth that are the hallmark of best of the best companies. They are getting estimate increases and upgrades from the analysts and the big money is sitting up and paying attention to these leading stocks.

Here is a list of some of the S&P 500’s best of the best right now:

Symbol Company Name Quantitative Grade Fundamental Grade Total Grade
GD General Dynamics Corporation A B A
NLSN Nielsen N.V. A C A
GAS AGL Resources A B A
AVGO Avago Technologies Limited A B A
ACT Actavis PLC A B A
POM Pepco Holdings A B A
HUM Humana A C A
SLB Schlumberger A B A
HAR Harman International Industries A B A
NFLX NetFlix A B A
FB Facebook A B A
BLL Ball Corporation A B A
UA Under Armour A B A
DAL Delta Airlines A A A
TAP Molson Coors Brewing A B A
COP Conoco Phillips A B A
AAPL Apple A B A

You can build a pretty nice portfolio from this list of stocks as we go into earnings season. You have a wide range of industries represented including social media, oil and gas, airlines and pharmaceutical. There are plenty of stocks that should zig when other stocks in the portfolio might zag. The airlines and oil related companies are a good example of what I call zig zag diversification. Higher oil prices are great for Conoco Phillips and not so great for Delta airlines as an example.

As earnings season progress don’t give into the urge to bottom fish and avoid buying stocks with luke warm prospects. Leave those to the indexing crowd and the closet indexer mutual fund managers and focus your attention on those S&P 500 stocks with the very best fundamentals. Keep your portfolio locked and loaded with the stocks that will lead the way higher and not those bringing up the rear.

Sincerely,

Louis Navellier

Louis Navellier

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