Sandbagging Guidance in an Aging Bull

Steve Kanaval |

Earnings season has evolved in a post Sarbanes-Oxley era into two distinct categories:

Category #1: "Everyone is watching me on the 90-day clock."

Category #2: "I know I can tweak the sales channel to delay earnings for a future reporting quarter."

As we roll into the summer 2015 earnings season, all signs are showing weaker sales and guidance and companies seem to be choosing option #2. I need to warn those companies sandbagging earnings, the investing world will exit stocks after two consecutive earnings misses – so it is a dangerous game for the CEO/CFO to play.

Just a further warning - a miscalculation can collapse the industry multiple your stock carries – specifically, if you are in a growth industry like technology and it's sub categories like search or battery technology. In fact, I think it may not be sandbagging, I think the companies are actually far below the projections for which they base 2015 numbers affecting the overall trajectory for sales and eventually stock price.

In short I think both Tesla (TSLA) and Baidu (BIDU) are pulling back, but if I were to choose between these two sandbaggers, I would pick TSLA. I am not sure they make new highs in 2015, but you can count on 2016. On the other hand, BIDU can easily be down 25% this year and easily retest $150 and stay put. Today's action will be important to see who stays in the boat.

As a portfolio manager, I can no longer sit with the risk of TSLA, BIDU, Netflix (NFLX) , Priceline (PCLN) Chipotle Mexican Grill (CMG) or Google (GOOG). Only FaceBook (FB) is a safe lilypad, or maybe LinkedIn (LNKD) can hold up in a sell-off too, but some of these mega-cap plays are over, which is why they head safely for the comfort of a retail stock split (Hello NFLX!).

Earnings Expectations in the Age of Transparency

It used to be easy in the old days when you were a car manufacturer or someone like Alcoa (AA) and you wanted to make sure you eliminated lumpy revenue numbers occurring in June. You were able to tweak production to solve a problematic Q3 by lowering guidance numbers by a few clicks. As a CFO, you knew you could easily beat those projected numbers in September. But this all changed in the late '90s when analysts became smarter than the companies they covered because of total transparency in the research the analysts could do. 

In 2015, the companies know much more than the CFO about the business and sales channels the company sells into, and they have spreadsheets that are more accurate and predictive than any inside the company. Now I am talking about major firms like Goldman Sachs (GS) and Morgan Stanley (MS)  – not your middle of the road analyst coverage. But a Wall Street analyst knows the companies they cover better than the CFOs, and it is how he sells himself to hedge funds on Wall Street.

I saw Tesla and Baidu with earnings misses before the open today and I caution those CFOs against the often used Q3 "sandbagging". There is a scary monster on the other side of that fence who patrols a graveyard of dead or dying C-level risk takers before you. So take heed. This aging bull market cannot be sidestepped or tweaked. It is currently forming a division among the haves and have nots, and with a 50% collapse looming in the Chinese stock market in the background, no internal tweak like guidance will be able to save your lumpy revenue or lack of sales.

Just put it all out there. The analysts know the company better than you know it, anyway, and are not fooled. the world has changed since the '90s and this is a dangerous, snarling, aging bull fighting off the bear who looms with a red Chinese star adorning it's chest.

Steve Kanaval is the author of the upcoming Equities.com's Small-Cap Throwdown, a premium newsletter designed to help investors identify the best small-cap stocks to add to your portfolio and trading ideas to profit off them. The first issue pits the hottest beverage small-cap stocks against each other to find a winner. Sign-up here for a free issue today!

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