Groundhog Day

Yesterday, to me, felt a lot like Groundhog Day. Of course, yesterday was Groundhog Day, but I was actually thinking of the 1993 movie with Bill Murray and Andie MacDowell. Most great films are, at their core, all about some form of redemption, and this movie is more explicit about it than most. Murray's character, Phil, gets to--or has to--live the same day over and over again until he gets it right (and gets the girl, Andie MacDowell's Rita). The clever conceit here is that Phil has the chance to change his behavior some with each recycling of the same day, over and over again, until he attains a redemption that is heralded by an alarm clock radio that no longer awakens him with Sonny and Cher's I Got You, Babe.

Earnings reporting season, as we have noted before, serves as a quarterly referendum on our stocks. The stocks that exceed expectations tend to move higher, while the ones that fail to live up to expectations are taken out and shot, as if they were traitors to their country. And traitors they are if they can't perform as they are supposed to. Having lived through more earnings seasons than I care to count, I tend to get that Groundhog Day sense of deja vu, of having seen it all before and looking for the ways it will be different this time around. One lesson of the movie is that events may not change, but we can change. So, as another earnings season winds down, we learn something else to make us better investors. Enough philosophizing, let's get back to investing.

What I write about here is really not supposed to be advice, so I'll just say that I hope my readers "heeded my observations" and steered clear of Radio Shack (RSH, $7.35) before the bear trap sprung. On Monday the company announced (in what is known as a "preannouncement") that fourth quarter earnings per share would be in the $.11 to $.13 range instead of the $.37 expected by analysts. The market responded by taking the stock down about 30% (Bang!). I was not surprised at all by RSH's miserable performance, but I am still scratching my head over how some analysts rated the stock a "buy" at $15, then at $12, and then at $10. Only after the stock cratered to $7 and change did those analysts downgrade the stock to a "hold." There were plenty of red flags already waving about RSH, such as the horribly disappointing earnings they reported in October for the third quarter, $.15 vs. a $.36 consensus estimate. The lesson here is that we need to avoid taking analysts' "buy" recommendations at face value, and we should focus on those buy-rated stocks where the analysts are revising their earnings estimates upward, not downward.

On the positive side of the ledger, there were some very positive earnings reports from companies we've looked at here over the last few weeks. We've already taken a look at Apple's unbelievable blowout report, and two of the company's suppliers came through as we expected. Broadcom (BRCM, $37), which was trading around $32 in mid-January, reported earnings of $.68 vs. a $.65 estimate, and Qualcomm (QCOM, $61) earnings came in at $.97, ahead of the $.90 estimate. QCOM, which is up from $56 when we mentioned it here in January, also raised fiscal year (FY12) guidance to $3.55-$3.75 from a previous range of $3.42-$3.62. Tempur-Pedic (TPX, $68) was trading at $59 when we looked at it here in mid-January, and the stock moved up nicely after reporting earnings of $.84 vs. the $.82 estimate--and after raising FY12 guidance to $3.80-$3.95, above the consensus of $3.77. TPX is doing quite well right now, and should get a further boost if we see a robust recovery in housing. Their mattresses are in the luxury goods sector, so they are part of our "Tale of Two Cities" investment thesis. Even when companies don't beat their estimate, their stocks can still rally if future guidance is bullish. Las Vegas Sands (LVS, $51), up from $43 when we featured it here in mid-January, reported on-the-estimate earnings of $.57, and analysts are very positive about the company's prospects in Macau and Singapore.

It is worth noting that the percentage of companies beating estimates is down somewhat from historical norms. That raises some concerns about the overall economic climate, but it can actually work in our favor. As the field of performing companies gets narrower, investors will be more likely to put premium valuations on those firms that can deliver. That means that disciplined and focused stock-picking is essential for investment success. No "throwing darts" at the stock tables!

It's most encouraging to see stocks following our script, even if the feeling is better described as vindication instead of redemption. Whatever you call it, it's refreshing to wake up to something other than Sonny and Cher playing on the radio. How about some Roadhouse Blues from The Doors (I woke up this morning and I got myself a beer.......)?

Life is short. Get busy.

Jim


Disclosure/Disclaimer: My family members and/or I own shares of AAPL, BRCM, QCOM, TPX, and LVS. Stocks are mentioned here for the sole purpose of illustrating investment concepts, and the mention of any stock should not be construed as a recommendation to buy or sell any specific security.