The third-quarter earnings season has been an absolute stunner.
Of the 92% of S&P 500 companies that have so far reported their financial results, about 81% topped earnings estimates and 75% have beat sales forecasts. The S&P 500 has posted average earnings growth of 39.1% and average sales growth of 17.5%. To put this into perspective, that’s the third-highest earnings growth and second-highest sales growth since 2008.
Looking forward, however, earnings momentum is tapping the brakes and slowing down for many S&P 500 companies. FactSet anticipates fourth-quarter earnings growth of 20.9% and sales growth of 12.3%. Double-digit earnings and sales growth is nothing to sneeze at, but with year-over-year comparisons growing more difficult, the stock market is growing more selective.
In other words, all the money that’s expected to pour into the stock market in the upcoming months will chase fewer stocks. The smart money will be focused primarily on companies able to maintain robust earnings and sales momentum in the current environment. Those stocks with positive analyst revisions will also garner their fair share of investors’ attention.
It’s a recipe for the cream to rise to the top – while weaker stocks get hammered.
I purposefully designed my Portfolio Grader to distinguish between the two…before the rest of the world catches on.
What I’m looking for are strong fundamentals – good margins, earnings growth, optimism from analysts. That’s the bedrock of my “Quantum A” stock-picking system. These things might sound like common sense, but far too many investors neglect them. And I find that’s often the case with growth stocks that are receiving more hype than they really deserve.
Sure, we all want growth. But often times, eye-popping revenues can hide a lot of evils, and result in much more hype than is really warranted. This sends people stampeding into exactly the wrong names.
Luckily, we can also use my Quantum A system to avoid them. Even if they looked great before.
That was the situation with Enron in the early 2000s.
How My System Detected the Biggest Financial Fraud of All Time
Before Enron became one of the most infamous stocks ever, it was a great growth play.
Enron was once America’s seventh-biggest company, but also “America’s most innovative company” in Fortune magazine (six years in a row).
And at one point, it was a big, flashing, “A”-rated buy in my system. After I recommended the stock, it gained 36%.
Then Enron’s rating started to weaken. This was well before Newsweek declared “Lights out for Enron,” in December 2001. The corruption going on at Enron was yet to be discovered – but according to my system, the fundamentals certainly didn’t justify the hype.
So, we took our profits in Enron in April. It was one of the best moves of my career, it turned out! Other investors, sadly, got wiped out. Enron’s employees lost retirement savings. But we avoided the massacre that ensued a few months later.
Now, Enron is a pretty extreme example. So let me be clear: It does not take a massive financial fraud to wipe millions of dollars from the stock market.
When a stock gets into a bubble, even a much smaller prick will do it.
With that in mind, let’s look at some growth stocks that are simply not worth your money at this time.
No list of overrated growth stocks would be complete at the moment without Amazon.com, Inc. (AMZN). The company misfired badly when it reported results in late October, falling below Wall Street’s estimates for both sales and earnings for the third quarter. The stock has also suffered this year and has fallen well below the broader market’s rise.
But it’s not much of a surprise when you look at its performance for earnings and cash flow. Just take a look at Amazon’s Report Card from my Portfolio Grader.
No wonder Wall Street analysts are pessimistic for the fourth quarter…
Meta Platforms, Inc., formerly known as Facebook (FB), isn’t looking too good in my system, either:
Earnings season has not been too kind to Facebook this time around, nor has press coverage and estimates for the fourth quarter, which are down from a year ago.
PayPal Holdings, Inc. (PYPL) has gotten lots of attention in the press as the company is highly popular for offering easy, affordable, safe and reliable financial services. PayPal is also a major player in peer-to-peer payments through Venmo. However, new peer-to-peer players are popping up, including in e-commerce, that could soon disrupt the company.
And as you can see, falling sales and earnings growth and a subpar operating margin don’t measure up right now.
One of the world’s largest tech companies, Alibaba Group Holding Limited (BABA) fails on the metrics that earn stocks a Quantum A from me. BABA may have had a great “Single’s Day” event recently – the equivalent of Black Friday in the U.S. – but its earnings, margins and cash flow leave a lot to be desired. Add in an uncertain regulatory environment in China, and the cards just don’t align for this stock right now.
The video gaming industry has been on fire in recent years, particularly as folks were forced indoors due to the pandemic. The sector has managed to maintain its momentum as pandemic restrictions let up, but the prior level of growth will be hard to maintain.
Activision Blizzard Inc. (ATVI) is an example of a well-known stock in a hot sector that just doesn’t live up to the hype. The maker of the highly popular World of Warcraft and Call of Duty video games is actually down this year.
It’s little wonder when earnings and sales growth has been down. The stock has also suffered from a lack of interest from institutional investors, as can be seen from my Portfolio Grader’s failing Quantitative Grade.
You’ll notice that all the stocks I named rate fairly well on their return on equity. But as I’ve mentioned, there’s a lot more to a solid investment than that.
So, I’m looking elsewhere for great buys these days.
Four New Quantum A Stocks That Can Soar 500% or More
One of the things my system does best is find solid small-cap stocks.
Besides phenomenal growth, my Breakthrough Stocks are posting great profits and crushing their forecasts. When you can get in on a stock like this early on, when it’s still fairly small, that’s how fortunes get made.
I’ve just published a special report with full details on Four New “Quantum A” Stocks That Can Soar 500% or More as well as my special report, Five Breakthrough Stocks That Could Soar 1,000% in Total. To hear more, click here to check out Breakthrough Stocks and find out what my system has in store now.
P.S. Next Tuesday, after the market close, I will be releasing a brand-new buy that earns a “Quantum A” in my system. For its third quarter, the company posted double-digit revenue growth and triple-digit earnings growth. It also posted a double-digit earnings surprise. I see plenty of upside ahead for the name, which is why it’s a great buy now. Make sure to sign up now so you can get the name and the details of the stock right after I announce it.
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:
Amazon.com, Inc. (AMZN), Alibaba Group Holding Limited (BABA), Meta Platforms, Inc. (FB)