We’re fast approaching one of my favorite times of the year — the third-quarter earnings announcement season.
The reason why I get so excited during earnings season is because this is when the crème de la crème of stocks get their chance to rise to the top. Every company must open its books and show Wall Street how they performed in the quarter and share their longer-term outlook. Companies that reveal strong results and positive earnings and guidance are typically rewarded by investors, while those that post weak results and guidance are punished. In my forty-plus years of investing, I have found earnings have worked 70% of the time.
Now, for the third quarter, FactSet expects the S&P 500 to average 27.6% earnings growth and 14.9% revenue growth.
Yes, that is down from the 91% average earnings growth achieved in the second quarter, but the reality is economic growth is slowing, and year-over-year comparisons are now less favorable.
I should add that fourth-quarter estimates remain solid, with FactSet anticipating 21.5% average earnings growth and 11.4% average revenue growth.
Personally, I anticipate my fundamentally superior Growth Investor stocks will post strong sales and earnings results. My Growth Investor stocks are characterized by 46.9% average annual sales growth and 57.2% average annual earnings growth. The analyst community has also revised their consensus earnings estimates 14.9% higher in the past three months. So, I’m looking forward to wave-after-wave of positive earnings surprises in the coming weeks to dropkick and drive my Growth Investor stocks higher.
In fact, we got a taste of what strong earnings can do with Fastenal Company (FAST), one of my Growth Investor Elite Dividend Payers, this morning. The company achieved earnings of $243.5 million, or $0.42 per share, on $1.55 billion in sales, which compares to earnings of $221.5 million, or $0.38 per share, and sales of $1.41 billion in the third quarter of 2020. The consensus estimate called for earnings of $0.42 per share on $1.54 billion in sales.
Thanks to continuing demand for manufacturing and construction equipment, Fastenal Company achieved sales of $4.45 billion and earnings of $693.8 million, or $1.20 per share in the first nine months of the year. In comparison, the company reported sales of $4.29 billion and earnings of $663 million, or $1.15 per share, in the first nine months of 2020.
The stock rallied more than 2% in early trading on the heels of its strong results.
Now, the big banks, including JPMorgan Chase & Co. (JPM), Citigroup (C), Bank of America (BAC) and Wells Fargo & Co. (WFC), will release their earnings results this week, “officially” kicking off the earnings season.
FactSet expects the banks in the S&P 500 to tally about $31 billion in aggregate profits, up roughly 20% from a year ago but down 20% from the second quarter. Analysts also expect profits to stay flat in the fourth quarter.
Earnings estimates for the financials have risen because of more favorable economic conditions and higher Treasury yields, which benefit banks’ bottom lines related to their core lending businesses.
Also helping boost analysts’ predictions is the expectation that the big banks will release more in loan loss provisions they’d set aside to prepare for loan losses in the aftermath of the pandemic, though at a lower rate than during the first quarter of the year. That, in turn, will help boost the banks’ bottom lines.
On the other hand, loan growth for the big banks has been slow, climbing just 1% since the end of June.
JPMorgan Chase & Co.
- First to report will be JPMorgan Chase & Co. on Wednesday morning. Analysts anticipate earnings of $3.00 per share on sales of $29.7 billion. Over the past 90 days, eight analysts revised their estimates upward, while two revised lower. The stock is up over 31% year-to-date, and is up nearly 6% the past month.
Wells Fargo & Co.
- Analysts expect Wells Fargo & Co. on Thursday morning to announce earnings of $0.94 per share on revenue of $18.3 billion. Over the past 90 days, eight analysts have revised their forecasts for the bank upward, while six have revised downward. The company’s stock has gained over 56% so far this year and is up over 6% in the past month.
Bank of America
- Analysts expect Bank of America, which reports on Thursday morning, to announce earnings of $0.70 per share on $21.6 billion in revenue. Over the last 90 days, three analysts have revised their earnings estimates for the company upward, while nine have revised downward. Bank of America shares have soared over 44% year-to-date, and are up nearly 9% in the past month.
- Also reporting on Thursday, Citigroup is expected to see earnings of $1.79 per share on sales of $17 billion. Six Wall Street analysts have upped the estimates over the past 90 days, while six have downgraded the company. Citigroup shares are 16% higher year-to-date and have risen 3% in the past month.
Currently, these banks earn a B-rating in Portfolio Grader, making them “Buys” ahead of their earnings results. However, I don’t think they represent good high-growth buys and wouldn’t recommend them right now.
This is for two reasons…
First, I’m an ex-banking analyst who worked for a division of the government that is now part of the Federal Reserve. During my time there, I saw how they essentially “cook their books” and that scarred me for life.
Second, rising Treasury yields can eventually derail interest rate sensitive value stocks. Instead, I like to focus on high-growth, high-quality stocks that have historically prospered in a rising interest rate environment, and financials simply don’t fit that bill.
So, while the steepening yield curve and strong housing markets bode well for bank profitability in the near term, they may get into trouble if inflation runs too hot.
The bottom line: If you want to have a successful high-growth portfolio, these bank stocks should not be on your buy list.
P.S. Right now, successful Americans like us have a bullseye on our back.
We’re facing a direct threat to our safety and prosperity.
The values we hold dear, like individual freedom, hard work and fiscal responsibility have been tossed aside.
The U.S. national debt is growing at an unprecedented rate. And more spending is coming.
The cost of essential goods and services seems to get more expensive by the day. Critical materials are on backorder for months. Grocery store shelves are half-empty.
If you have any money in savings, in the stock market, in a 401k or even cash stuffed under the mattress, this should make the hair on your neck stand up.
To help understand the monumental problem we’re facing and why both our way of life and financial security are under attack, I put together a special presentation.
So, if you want to protect yourself and grow your wealth, I encourage you to watch this briefing now.
Note: 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:
JPMorgan Chase & Co. (JPM), Bank of America (BAC), Fastenal Company (FAST)