I’m not going to sugarcoat it—this wasn’t a good day for the market. Between Walt Disney Co.‘s (DIS) disappointing earnings report and the implosion of Staples Inc.‘s (SPLS) and Office Depot‘s (ODP) merger, Wall Street had no shortage of bad news. However, while some of this news came as an unwelcome surprise, there was one disappointment that I could see coming…
Today, shares of Fossil Group Inc. (FOSL) plunged nearly 30% after the watch, bags and accessories maker posted first-quarter results. While the company was able to beat analysts’ Q1 earnings estimates by 43%, its revenues just missed the $667.8 million consensus estimate.
To add insult to injury, the company slashed its 2016 forecast. Fossil now expects to earn between $1.80 and $2.80 per share. This is a dramatic reduction to its previous guidance of $2.80 to $3.60 earnings per share. This is also well below the Street view of $3.02 per share.
The bottom line is that Fossil is starting to live up its name. In this era of smart watches and wearable tech, Fossil’s watches are losing their luster. The company is having a difficult time coping with the new competition, and it isn’t expected to turn itself around anytime soon.
Now, the good news is that there are ways to avoid the next Fossil. There were a few tell-tale signs that FOSL was going to disappoint, and these can be applied to any stock that you currently own.
First, in the months leading up to its earnings report, analysts were racing to the bottom with their EPS estimates. If you look at this earnings report page, you can see that over the past 90 days FY 2016 EPS estimates fell from $3.31 to $3.02.
Second, for the past several months, my Portfolio Grader stock rating tool has rated FOSL at a sell (or strong sell). Currently, FOSL earns a C-rating for fundamentals, with failing marks in sales growth, operating growth, earnings growth, earnings momentum and earnings surprises. But what has really hurt the stock is anemic institutional buying pressure; this is indicated in its F-rated Quantitative Grade.
So as you can see, it isn’t difficult to identify which stocks will disappoint during earnings season. If you want to avoid the next Fossil, I recommend that you keep an eye on analysts’ projections, and run your stocks through Portfolio Grader regularly.