DJIA Earnings Season: Bad News Is Good News

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The bull market had no economic announcements to propel stocks on Friday. Most earnings reports in the past 48 hours from Dow Jones Industrial Average companies have been lackluster, but investors may be looking for value stocks now as a buying opportunity. This will be almost counterintuitive on the surface, but this latest drop in many DJIA stocks may be a scenario where bad news is good news for those who missed out on the bull market so far in 2013, for those looking for the key stocks to buy and even some stocks to sell.

One key issue is that we have never updated our own DJIA 2013 upside target of 14,590 even though the DJIA went 300 points over that. Our value of the stock market will be updated soon. We still think stocks have not peaked for the year, but the bull market just got too far ahead of itself. We are seeing a front-running of the “sell in May and go away” mantra. Again, this is good news for long-term investors.

Earnings season is well into full swing and we have evaluated many DJIA stocks that have reported earnings. In doing so, we have seen which ones investors are likely to build positions in on weakness ahead and those that will require more selling or more weakness before investors start buying. We are evaluating the current price performance through earnings season and our expectations ahead on the following DJIA stocks: International Business Machines Corp. (NYSE: IBM), General Electric Co. (NYSE: GE), McDonald’s Corp. (NYSE: MCD), Caterpillar Inc. (NYSE: CAT), Microsoft Corp. (NASDAQ: MSFT), Intel Corp. (NASDAQ: INTC), Verizon Communications Inc. (NYSE: VZ), Bank of America Corp. (NYSE: BAC), Coca-Cola Co. (NYSE: KO), Johnson & Johnson (NYSE: JNJ), J.P. Morgan Chase & Co. (NYSE: JPM) and Alcoa Inc. (NYSE: AA).

International Business Machines Corp. (NYSE: IBM) is the first big concern, as it is actually the largest weighting of all stocks in the DJIA. This drop of almost 7% to $193 is after closing at $207.15 yesterday. We analyzed earnings and the bottom line is that IBM just cannot grow. So how is that good news? IBM will have some trimming again in its ranks (layoffs), and it is likely to sell off a couple of underperforming drags on the business. The company’s services backlog rose by $1 billion to $141 billion. This takes IBM back to where the stock was at the start of 2013, and we expect a big dividend increase announcement and an even larger stock buyback announcement in the coming days. A $14 drop in the stock price may not mark the absolute bottom, but long-term investors are likely to start nibbling in here and may try to build a position in the coming weeks if they missed the run.

General Electric Co. (NYSE: GE) is a dominant economic force, but not so much when it comes to the DJIA because of the index being price-weighted. GE earnings were truly nothing to write home about, and the stock is down 4% at $21.78. Its chart performance ahead of earnings was signaling that the price rise of 14% from the end of 2012 to the $23.90 year high was running too far ahead of itself. But now shares are down almost 10% from their recent peak after a 4% drop to $21.75. With a 3.3% dividend yield that is higher than all major conglomerates, investors likely will view any further weakness merely as an opportunity to start nibbling and legging into the stock.

McDonald’s Corp. (NYSE: MCD) is down 2% at $99.85 after its earnings disappointed. The reality is that McDonald’s just is unable to keep up with the gains made in prior years, and it could be in a no-growth era now. Its market value is $100 billion and is worth more than all of the public restaurant stocks combined. McDonald’s also trades at a P/E premium to the broader market. That being said, Mickey-D’s has a 3% dividend yield that is the envy of other defensive restaurant stocks. The pullback is still only $4.00 shy of the 52-week high, and we think that investors may not really get aggressive until (or if) this stock gets back down to $95 or so.

Caterpillar Inc. (NYSE: CAT) is set to report earnings Monday, but this industrial equipment giant just signaled another month of lower sales in its monthly update. The numbers are really bad, but not as bad as the drop in February: Asia/Pacific was down 24% in March, after being down 26% in February. Latin America was actually up 12% in March, after being up 3% in February. So on a down day, Caterpillar is up by 0.2% on what looks like bad news ahead of earnings. We do not expect a good earnings report, but the stock is barely $2 above the 52-week low and analysts still expect the stock to rise $27 from this base.

Microsoft Corp. (NASDAQ: MSFT) is actually up 3.5% at $29.82, despite earnings without excitement. We identified this as one of the DJIA stocks with the most upside for 2013, and so far it is living up to that. We had no illusions about the Windows 8 sales being great, but the software giant just is not as down and out as some have considered. That 3.2% dividend yield helps too.

Intel Corp. (NASDAQ: INTC) managed to show sales and earnings that managed to hold up better than the bears were expecting. One analyst even said he cannot see what the bears are hanging on to, and the company is trying to make its architecture sales growth ramp even further as it tries to really get into mobile. At $22.30, this is above the pre-earnings price, and the dividend yield is a whopping 4.2%. One word of caution is that the stock price is close to the consensus analyst target, but it is still down $7 from a 52-week high.

Verizon Communications Inc. (NYSE: VZ) has managed to not sell off, and the stock is back at a decade high. We cannot help but wonder how much lower the dividend yield of 4.2% will be able to go from share price appreciation, but that being said, it already went higher than what we expected. Investors are likely to step in if there are any real pullback opportunities here. The question we have is how much higher it can go if it leverages up further to take more of the Verizon Wireless stake from Vodafone.

Bank of America Corp. (NYSE: BAC) is still very important to the economy, but it is very low on the totem pole for DJIA stocks because of such a low price. We identified that its earnings were just not good enough because the stock rose so much this year and was the best DJIA stock of 2012. There is a huge discount to book value, and banking analysts Meredith Whitney and Dick Bove are calling for much higher prices.

Coca-Cola Co. (NYSE: KO) showed a drag on earnings due to the impact of currencies. There is still a secular threat to soft drinks in developed markets as well. With this stock still within pennies of a multiyear high, it seems that those who want to own Coke do own Coke. Also note that this beverage giant is trading at close to 20 times this year’s expected earnings.

Johnson & Johnson (NYSE: JNJ) has the recall and quality control issues behind it. Earnings allowed it to hit a new all-time yet again. Most of its business lines are growing, and currency did not kill its efforts. The 2.9% dividend is about to go up, and we expect that as soon as the coming week.

J.P. Morgan Chase & Co. (NYSE: JPM) is still lower than it was when it reported earnings. The banking giant is still up 10% or so in 2013. The 3.2% dividend yield is keeping investors interested, and the consensus price target remains close to 20% implied upside at $55 on the stock. If this weakens further, investors likely will start nibbling in again over the coming weeks.

We already have said that Alcoa Inc. (NYSE: AA) needs to lose its “earnings season indicator” status. This stock remains in the doghouse, as it is only 2% above the 52-week low. A turnaround here requires much patience and optimism. Investors are overlooking this one, but it has such a small DJIA weighting that it does not matter much to investors on a standalone basis.

The DJIA is down only about 300 points or so from its peak and is still up more than 10% for 2013. We would be careful in not trying to pick any firm or hard bottoms in any individual stocks. You saw how bad gold went recently for those who tried bottom fishing. Building a position can be done over weeks or even months. If “sell in May and go away” takes hold yet again in 2013, patience will be rewarded.

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