A Morgan Stanley analyst last week said the post-earnings conference call with Tesla's Elon Musk was the "most unusual" he had witnessed in his career. That's one way of putting it. The electric car maker's share price tanked after Musk refused to answer "boring bonehead questions" from analysts. "These questions are so dry. They're killing me," he complained, before allowing the session to be dominated by questions from a Tesla fanboy who hosts a YouTube channel.
After the call, Musk had the temerity to crow about how Tesla had beaten Wall Street estimates, but that was only because they had been slashed in recent months, from a loss of $2.02 a share to $3.54. Wall Street Journal columnist Charley Grant was more blunt than Morgan Stanley, tweeting that Musk's behaviour was "an embarrassment to the capital markets". He's right.
Two months ago, Moody’s downgraded Tesla’s debt to junk status. Tesla has burned through more than $1 billion in three of the last four quarters and a growing army of analysts expect the company will have to raise money later this year. Musk says it won’t but Tesla has a long history of over-promising and under-delivering; investors and analysts are entitled to ask questions.
Why are markets ignoring great earnings?
US earnings season continues to be outstanding, and markets continue to say: meh. With most cost companies now having reported, it looks like around 80 per cent of companies will beat estimates.
Now, earnings season is full of games and it’s normal to beat estimates – this is the 35th consecutive quarter in which companies topped expectations. This quarter is exceptional in two respects, however. Firstly, the current beat rate is on track to be the highest on record. Secondly, the scale of the outperformance – 5.7 percentage points ahead of estimates, way more than normal – is very impressive. Nevertheless, stocks have slipped, with the poorest post-earnings performance seen in the cyclical technology and industrial sectors. Some analysts argue that’s because both sectors enjoyed strong rallies prior to reporting, while others say investors are positioning themselves for a turn in the cycle. If so, they may be too early. Markets like to look ahead, but not too far ahead – JP Morgan notes the S&P 500 has traditionally peaked about five months before the start of a recession, with a range of one to 12 months. For February’s market peak to have marked the high, a recession would need to begin in late 2018 or early 2019. That looks very unlikely, given current economic indicators. Earnngs growth and profit margins may be peaking, says JP Morgan, but that’s typically associated with “less equity outperformance versus bonds rather than outright equity declines”. In other words, stocks should ultimately overcome recent weakness, with further price highs still likely in 2018.
Is Apple running out of ideas?
Apple is buying back $100 billion of its own shares. Is this proof the company is running out of ideas?
No, says Ritholtz Wealth Management's Michael Batnick. Share buybacks get a bad rap, says Batnick, with critics seeing them as evidence of fatigue. Real companies invest in R&D, the argument goes, whereas tired companies devoid of ideas return money to shareholders. That's wrong on two points. Firstly, Batnick cites research showing companies investing heavily in things like R&D have tended to "make for really lousy investments". Secondly, just because Apple is using its huge cash mountain to buy back shares doesn't mean it's shirking on R&D – it has spent $41.5 billion on R&D over the last five years. "Apple is earning more money than any other company in the world, and they're being responsible with it", says Batnick. Instead of splurging on some ill-conceived vanity project, they're being patient and "staying in their lane".
Don’t sell in May and go away
The old “sell in May and go away” line invariably does the rounds at this time of year, but investors shouldn’t worry. On the one hand, global returns do indeed tend to be much poorer over the following six months. It’s also the case the phenomenon tends to be even more marked in mid-term election years, as 2018 is in the US.
However, LPL Research points out returns tend to be much more positive in uptrending markets (the S&P 500, despite recent troubles, remains above its 200-day moving average). Historical stats aside, "sell in May" may be a fluke, given there is no obvious fundamental explanation for this seasonal pattern. Finally, stocks have actually gained in the May-October period in five of the past six years. In fact, they usually do, even if returns tend to be underwhelming. "If you sell in May, you should expect to buy back higher in November," says Fat Pitch blogger Urban Carmel. "For most investors, that's all that matters."
