Most of you know the K.I.S.S. acronym as being: Keep It Simple Stupid

And the best way to keep it simple with investing is to focus on earnings. That’s because it is absolutely the primary driver of stock prices.

Yes, the 24/7 investment media often confuses us with what’s important. At times we are told to focus on different things like analysts or insiders or stock charts or institutional buying or astronomical signs.

However, at the end of the day companies are valued based upon what someone is willing to pay for the future stream of earnings. And that is why quarterly earnings season is so important. Not just for individual stocks, but for market direction as a whole.

Think about the last two nasty corrections for the stock market (January 2016 and October 2018). At their roots they were both tied to a severe reduction in earnings estimates for coming quarters. In fact, back in 2016 we endured a prolonged corporate earnings recession where estimates headed lower and lower. And stock prices came down with it until the fundamental outlook brightened.

So as Q1 earnings season kicks off, now is a good time to look at earnings prospects and what it means for the overall market.

Low Expectations is Fertile Soil for Stock Gains

Earnings for S&P 500 companies are expected to fall 4% year over year in Q1. That is a pretty grim outlook, and yet stocks have been rising boldly in the face of this news.

Why?

Its not really as bad as it sounds. You have to remember that Q1-2018 is when the new corporate tax cuts kicked in and earnings exploded 24.9% higher. So really stocks are suffering from tough comparisons.

The silver lining in this news is that revenues are expected to rise 4.6% for the quarter. And that earnings growth is likely to get back on track in Q3 and Q4 as you will see in the chart below.

Let’s also remember that the market likes to “Climb the Wall of Worry”. Meaning that stock gains are often made when fear and concern are overdone. As future prospects prove better than expected, then stocks continue to rally. Those conditions were clearly the case over the past few months and may very well continue depending on whether stocks can beat the current low expectations.

Early Results Look Promising

Earnings season kicked off Friday with a sample of leading banks: JP Morgan Chase (JPM) and Wells Fargo (WFC). Both provided impressive beats acting as a catalyst for the overall market to finally make the leap over 2900 for the first time since the onset of the Q4 correction in October.

What makes these earnings reports so impressive is that banks do better in a rising interest rate environment. And yet during Q1 rates headed lower and lower, which is why these early bank results are so encouraging.

2 reports does not an earnings season make. So I will continue to closely monitor these earnings results and provide updates in my commentary.

In the meantime consider reading some of the top articles featured on StockNews.com:

CASY, FL, ICE, ROK and UTX emerge as new Strong Buys

3 Ways “Shark Tank” Can Make You a Better Investor

Mobile Payments Could Be Big in this Largely Untapped Market

And be sure to check out some of the top commentary from our sister site, ETFDailyNews.com:

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I know many people have written off Microsoft (MSFT) as being another tech dinosaur like IBM. They just don’t get the love and adoration of Apple. And were left out of the famed FANG acronym like other tech darlings.

However, when you truly appreciate how they have seriously changed their business strategy, with a much bigger concentration on the cloud…then you can then open your eyes to 3 straight years of non stop earnings triumphs and share price gains.

Even though shares have tripled in value over the last 4 years, most analysts see plenty of upside ahead. In fact, 5 Star analyst, Keith Weiss of Morgan Stanley, recently posted a street high target of $140. Daniel Ives of Wedbush is right there with him.

With these shares you get a steady as you go tech growth stock that is enjoying ample momentum while still being undervalued. And if that wasn’t good enough you still get an ample dividend.

So when you put it altogether you may very well want to add these shares to your portfolio. And then lobby other investors to elevate Microsoft once again into the top tier of tech companies with the new acronym MFANG

Microsoft (MSFT) is not the only stock enjoying a POWR Rating of A – Strong Buy. Other top software companies also enjoy this positive rating including Oracle (ORCL), Adobe (ADBE), WorkDay (WDAY), Atlassian (TEAM) and Zendesk (ZEN).

Discover all the stocks enjoying a Strong Buy rating at https://stocknews.com/best-stocks/.

Every weekday we update our POWR Rating system with a fresh batch of stocks rising to the coveted rating of A – Strong Buy.

Below I highlight 5 of those stocks that most recently got added to the Strong Buy list. To see all those top rated stocks go to: https://stocknews.com/best-stocks/

United Technologies (UTX) 

It’s rare for cyclical to have such consistent earnings growth. However, UTX has seen earnings climb as steadily as their Otis elevator business unit. The smart money is noticing too as top hedge funds have been adding shares at a rapid pace. That’s a good sign that UTX should see more upside ahead.   

Intercontinental Exchange (ICE) 

With only 1 earnings miss in 5 years ICE is setting a good example for other companies. This explains the steady as you go share price appreciation year after year. Yet with as much as shares have gone up analysts still see room for ample upside. In fact, 5 Star analyst Alex Kramm of UBS is pounding the table the hardest as he sees shares climbing to $88 later this year.

Rockwell Automation (ROK) 

The ISM Manufacturing index has been very strong for the past couple years which is good news for firms Rockwell serves. This has led to ample increases in profits that is surprising for a company that already sports a $22 billion market cap. The profit train is expected to keep rolling on with an above average 11.3% expected growth this year…this should keep ROK rallying ahead of the pack.

Foot Locker (FL) 

This was one of the best growth stories in all of retail until their earnings imploded like Zion’s high tops. From the depths of 2017 earnings growth has gotten back on track. Plus the share price has doubled in that time. Just a week ago Sam Poser of Susquehanna said that he believes FL is undervalued and should be making its way to $80 in 2019.

Caseys General Stores (CASY) 

What could seem more mundane than a gas station with convenience store attached? That is a dime a dozen proposition. But there is something special about the way Caseys does it, which is why the company, and its stock has enjoyed such tremendous success over the years. The latest 25% earnings beat put everyone on notice that it makes sense to pump some of these gas station shares into your portfolio.

CASY, FL, ICE, ROK and UTX are just a small sample of the POWR Rating Strong Buy stocks. Are your stocks on the list? Find the answer at https://stocknews.com/best-stocks/

Last week I shared my Stock Market Outlook for the Rest of 2019. The natural follow up to that is to point out where an investor can find outperformance at this time.

The short version of that story is to say: do the opposite of 2018.

Meaning that 2018 was in the red…especially the 4^th quarter. This creates a “Flight to Safety” with these stock groups holding up the best:

• Large caps
• Defensive Industries (utilities, healthcare, consumer staples).
• High dividend yield stocks

I am not saying these groups will suffer going forward. Just that they are likely to underperform. So those seeking to do better than average should look elsewhere for upside. That lists starts with the opposite of above:

• Small caps
• Economically sensitive industries
• Earnings growth more important than income.

Let’s talk about each of these ideas individually to help navigate a path to outperformance in 2019.

Small Caps: Good Returns Come in Smaller Packages

The Russell 2000 small cap index fell -12.2% last year. However, from the August peak to December valley was a much more painful -27.3% drop.

Yes, small caps have outperformed to start the year. However, there is much more upside as the index is still 10% under the previous highs while the large caps in the S&P are now less than 2% from making new highs.

To be clear, there is nothing wrong with mid-caps. There are plenty of attractive choices in that group. I just don’t want investors clinging to all the “usual suspect” large cap names. They just have less gas in the tank for the long ride higher ahead.

The Economy is Fine…So Ride the Wave

In Q4 some investors thought the sky was falling and perhaps another recession and bear market were in the offing. When that it is the case, it is wise to get rid of stocks that depend on an expanding economy to fuel their earnings growth and share prices.

As it clearly turned out, that was a false narrative. The economy continues to expand with no serious sign of a recession in sight. So it is wise to overweight some of the economically sensitive groups that were hit the hardest in Q4 like:

• Industrials
• Basic Materials
• Consumer Discretionary
• Technology
• Energy

Seek Growth Over Income

The reason for overweighting growth stocks is not just because they were beaten more severely in Q4. It is also about current market conditions.

Remember that overall earnings growth is grinding to a halt after an impressive 2018. That’s because the 20%+ average earnings growth last year was caused by a one-time event of lower corporate taxes. Now that the rush of adrenaline is wearing off, earnings are coming back down to earth. In fact, current estimates are calling for a modest decline in Q1 earnings over last year.

This means that there is a growth shortage taking place. This is leading investors to bid up stocks that are beating the odds with exceptional growth prospects. I recently wrote an article pointing out some stocks that are experiencing exceptional growth that look primed for future outperformance.

CRM, SHOP and WDAY head list of Top 5 Cloud Growth Stocks

That is good place start your exploration. And here links to some other commentaries and resources to get you on the right track for stocks likely to outperform in 2019.

Stock of the Week: Delta Airlines (DAL)

5 stocks newly upgraded stocks worth your attention

Full List of A-Rated Strong Buy Stocks

Until next week…wishing you a world of investment success!

Still one of my favorite investment stories comes from Warren Buffett. He was asked the secret to becoming a millionaire. And this is how he answered: Put a billion dollars into the airline industry…soon enough you will become a millionaire.

Over the long haul that is not true…but yes, airline stocks fly by a turbulent pattern that often has investors grabbing for the sickness bag. On the other hand there are times they are one of the hottest groups around and investors not on board will miss out on a great profit ride.

That time seems to be now, especially for Delta Air Lines (DAL). At the start of April they released their monthly operational metrics. The result was a 10% lift off in shares in the 2 days that followed boosting DAL to a POWR Rating of A – Strong Buy.

This should not be a shock to anyone because the industry is one of the most economically sensitive. So when the economy is in expansion mode, airlines are right there enjoying the ride.

But if you are going to invest in this industry, you need to cast your lot with one of the most consistent players to avoid any ferocious descent. Delta certainly fits that bill with 18 of the last 20 quarters being earnings beats.

Lastly, the company is putting cash to good use for investors. Ample buybacks, lofty 2.5% dividend and strategic long term investments in capacity. With all these positive catalysts at play you might want to buckle up some of these shares in your portfolio.

Delta Air Lines (DAL) is not the only stock enjoying a POWR Rating of A – Strong Buy. Microsoft (MSFT), Verizon (VZ), Mastercard (MA), Oracle (ORCL), and Nike (NKE) have also been awarded this coveted rating. Discover all the stocks enjoying a Strong Buy rating at https://stocknews.com/best-stocks/.

The bull market is in year 10 and looking a bit aged. And as we enter Q1 earnings season it turns out that the average company is projected to post a modest earnings decline.

This means that there is a growth shortage…but those stocks with the best growth prospects are likely to outperform. And no group is experiencing more widespread growth than those effectively using the cloud.

Here are 5 impressive cloud-based stocks that combine the catalysts of a POWR Rating of A (Strong Buy) and expected earnings growth north of 20% per year. (Discover all the A rated POWR Stocks at https://stocknews.com/best-stocks/) 

Workday (WDAY) 

Shares have more than doubled in the past couple years. This is no surprise given that Workday is at the nexus of some of the hottest trends. Big data + cloud computing to help with human resources. For as much as shares have soared of late, top analysts are still pounding the table for more including a street high $250 target.

ServiceNow (NOW) 

Some similarities to Workday, in this case they are using the cloud to help with business automation. That formula has been good for a 3X rise in shares since the start of 2017. The outlook calls for 28% earnings growth going forward, which should help NOW propel to even greater heights.

Shopify (SHOP) 

This is our 3^rd stock floating on the cloud. Shopify’s strength is their ecommerce platforms to help companies sell more online. This is still very much a growth opportunity with earnings slated to rise 24% a year for several years to come. They are riding a streak of 14 straight beat and raise quarters. The trend is definitely their friend.

Salesforce.com (CRM) 

You know who they are…and what they do. That’s because they are considered the best of breed provider of sales, CRM and marketing based software solutions. For as much as they have grown over the years, analysts are still projecting 23% growth per year through the middle of next decade. No wonder 5 Star analyst Brian Peterson of Raymond James proudly waves a street high target of $200.

Arista Networks (ANET) 

The 4 stocks above are all providing various software services on the cloud. However, someone has to help build the networks to effectively support the cloud…Enter ANET. After a mighty stumble during the Q4 correction, shares are racing to new highs once again. Given the ample 20%+ growth profile going forward you understand why shares are likely to stay on the ascent.

All 5 of these stocks (ANET, CRM, NOW, SHOP and WDAY) are currently enjoying a POWR Rating of A – Strong Buy. To see the other stocks currently enjoying this superior rating go to:  https://stocknews.com/best-stocks/

This morning we have a fresh batch of stocks upgraded to Strong Buy in our POWR Rating system. I have hand-picked 5 of these stocks which have the right blend of fundamental and momentum attributes to excel in the year ahead.

See the full list of POWR Rating Strong Buy stocks here: https://stocknews.com/best-stocks/

WalMart (WMT) 

The US consumer is in a good place with low unemployment and tame inflation. This leads to ample spending with top retailers like WMT enjoying the benefit. For as much as shares as shares have rallied from their December low analysts see more upside with an average target price of $112.   

Tableau Software (DATA) 

This is one of the hottest trends in tech. Big data + cloud computing to help businesses improve their operations. Tableau is certainly one of the prime players in the space which explains why shares are up 3X in just over 2 years. With earnings projected to grow 29% on average over the next five years you understand why DATA shares continue to have tremendous upside potential.

United Parcel Service (UPS) 

UPS shares have rallied virtually non-stop from the late December lows. And why shouldn’t they? The US economy continues to grow which provides a healthy environment for leading transportation companies like UPS. Plus an appealing 3.3% dividend yield never hurt anybody.

Texas Instruments (TXN) 

Here we are talking about one of the most consistent large cap tech stocks pounding out beat and raise quarters non-stop from 2015 through 2017. However, the party came to a halt in 2018 with earnings projections tumbling down and shares stagnating. The outlook has stabilized with many analysts expecting a return to glory in 2019.

CNOOC (CEO) 

This large energy play from China is emerging from a dark period with lower energy prices, slowing of Chinese economy and concerns about trade wars with the US. Each of these issues is improving with shares testing all time highs set a few years back. $209 is the average target price from Wall Street. However, $229 is the street high.

All 5 of these stocks (CEO, DATA, TXN, UPS and WMT) were recently upgraded to a POWR rating of Strong buy. Discover all the stocks with this coveted rating at https://stocknews.com/best-stocks/

Consumer Goods is currently rated the #3 industry by our POWR ratings system. This should not be a shock to anyone given how the US consumer is being bolstered by the lowest unemployment rate in 50 years. Toss in the tax cuts started in 2018 and you understand why consumers are spending freely these days.

Inside the Consumer Goods group we currently find 6 stocks sporting a POWR Rating of “A” Strong Buy.  Let’s review what makes them so attractive going forward.

Proctor & Gamble (PG)

This consumer brand giant went through some tough times in 2015 and 2016. Gladly management righted the ship with a string of earnings beat that has shares hitting new highs once again. Plus you get a 2.8% dividend yield to pad results.

Unilever (UL)

Just like P&G above, this stock is lathering up some impressive earnings from its wide range of consumer products. The most recent quarterly report has investors expecting even loftier earnings ahead with shares sprinting higher.

Colgate-Palmolive (CL)

Recent results have shown a fair number of cavities. Management is trying to brush away these problems and Steven Strycula of UBS believes they will be successful. That is why he recently raised his target to a street high $75.

Kimberly-Clark (KMB)

This is often considered one of the most defensive stocks because no matter the economy you still need paper towels and diapers. This is why shares stayed aloft better than most during the Q4 correction.  The dividend yield is also a full percentage point above the 10 year treasury making KMB an attractive choice for those seeking ample income.

Clorox (CLX)

Clorox is enjoying a clean sweep of 8 straight quarters of impressive earnings which has shares steadily on the rise. Analyst Kaumil Gajrawala from Credit Suisse saw enough from CLX to recently add a Buy rating to shares with a street high $172 price target.

Church & Dwight (CHD)

CHD may be the smallest company mentioned today, but their growth brands like Oxiclean are propelling shares higher. Even with shares up 40% in the past year some are calling for even more like 5 Star analyst, Kevin Grundy of Jeffries, seeing even more impressive upside in the year ahead.

Check out my recent article highlighting the top stocks inside the #1 rated industry: Software Applications https://stocknews.com/6-strong-buy-stocks-from-the-1-rated-industry-2019-03/

All 6 of the stocks in this article are currently POWR rating of “A” Strong Buys. You can see the rest of the stocks enjoying this coveted rating at https://stocknews.com/best-stocks/.

Instead of keeping you in suspense til the end of the commentary, I will lay it out for you now. I am bullish. But cautiously bullish…as in sleeping with one eye open awaiting signs of when the next bear market comes out of hibernation.

I think we all appreciate that this 10 year bull market is getting long in the tooth…about twice as long as the average bull market. However, bull markets don’t die from old age. Typically there are 3 catalysts that produce a bear market. We will discuss them below and see how this market measures up.

Bear Cause #1 = Recession

We all understand why this form of economic failure leads to a bear market. The key is to see it coming early enough to lower your allocation to stocks, or even short the market, before losing too much money.

What far too many investors are failing to appreciate right now is the difference between the words “slow” and “slowing” when it comes to economic growth. Yes, the economy is slowing from the robust 4% pace from last year. That is 2X the growth rate of the previous several years because it was fueled by a massive corporate and individual tax cut.

Those tax breaks were like a shot of adrenaline where things slow down back to normal after the effects wears off. But slowing back down to a normal GDP pace is a far cry from the idea of a slow economy…and most certainly is quite different than the notion of a full blown recession.

Lastly, let’s not forget that the average +2% GDP of the previous several years was good enough to produce a stock market that rose 300% from the lows of March 2009. So it is hard to say why some are in panic mode now when the evidence is quite to the contrary.

Bear Cause #2 = Inflation

The correlation between periods of high inflation preceding recessions and bear markets is very strong. The Econ 101 version of this relationship goes as follows…When consumers see inflation heating up they rush out and buy more of what they need for fear of even higher prices in the future. This initial burst in economic activity is followed by a decline in purchasing behavior which blossoms into a recession.

A secondary effect of higher inflation is that the Fed will raise rates in hopes of taming the rise of prices. At a certain point these higher rates hurt business investment and profits as borrowing becomes more expensive. Also bond rates start to look like a more attractive investment than stocks leading to a decline in share prices.

OK, that is the backdrop of why we need to be avid inflation watchers. But the reality on the ground is that inflation continues to moderate, which is why Treasury rates continue to decline. It also explains why the Fed has changed their tune about future hikes and are happy pressing pause for the time being.

Bear Cause #3 = Valuation

Most bear markets are born out of recessions. However, some of them are sparked by valuation bubbles. The most recent being back in 2000 when tech stock prices got out of hand. 

Right now the forward looking PE for the S&P 500 is 17.2. Yes, that is above the historical average PE of 15, but is actually a bargain for a stock market in the latter stages of a long bull run. 18-20 would be a more logical multiple at this time. So on this key value measure, there is no serious concern that would move us towards a bear market.

PE is not the only way to look at valuation. Really it is more logical to think of it on a relative basis versus the other investment options available. The most common benchmark is to consider the return on the stock market versus Treasury Bonds. We do this by turning PE on its head and think of it as E divided by P which is called the “Earnings Yield”.

The forward looking EPS for the S&P 500 stands at about $163.68. Compare that to the current level of the S&P 500. By dividing the latter into the former we find an earnings yield of 5.8%. That is more than twice as attractive of a return as the as the meager 2.4% yield on 10 year US Treasuries.

Historically these returns move towards par at the end of a bull market. It would take 2-3 years of higher inflation to get Treasury rates up that high. So really it is more about a green light for stocks to continue to rise before there are valuation concerns.

What Happens Next?

Right now it is a case of “3 strikes your out” for those calling for a bear market. However, those expecting this bull market to post another 12% gain in Q2 as it did to start the year are kidding themselves.

At this stage we should expect the market to get back to a more typical 10% a year pace. If that is true, then stocks should make new highs above 3000 later this year. Exactly when is a question that is unknown and unknowable…and in many ways irrelevant.

Why?

If the stock market is bullish, then just overweight stocks and don’t sweat the timing. The question of “which stocks?” is the healthier one to ask to find outperformance.

The answer to that question is to focus on stocks enjoying healthy momentum propelled by strong fundamental attributes. Those are the kinds of stocks that you will find sporting a POWR Rating of A – Strong Buy…and the stocks you will find in the recent articles I posted on StockNews.com. Read them now if you haven’t already.

Stock of the Week: PayPal (PYPL)

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No doubt you are familiar with PayPal (PYPL) as they dominate online payment processing. And perhaps you are also aware of their successful digital wallet product Venmo that grows into greater adoption by the day.

However, what we investors should really take note of is that they just processed their 14^th straight earnings beat since going public. This makes it one of the most consistent growth stories around, which is why shares are up 3 fold in the last 3 years.

Shares are enjoying serious momentum pushing shares to an all time high. This is the main reason behind PYPL attaining a POWR rating of A – Strong Buy. However, the reason I have chosen it as my Stock of the Week has much more to do with the attractive fundamentals. Especially the earnings momentum that is apparent in the string of beats.

I am not alone in my praise of shares. 5 Star analyst, Ramsey El Assel from Barclays just raised his target on shares to a street high of $117. No doubt other analysts will follow.

What’s also interesting is that insiders continue to acquire shares. That is very odd for a company that was an IPO not that long ago as Insiders are usually just selling their shares to lock in their new found wealth. Adding shares at this stage of the game is a strong sign that insiders know more growth and share appreciation is likely on the way.

PayPal (PYPL) is not the only stock enjoying a POWR Rating of A – Strong Buy. These are leading stocks have also been awarded this coveted rating: Broadcom (AVGO), Visa (V), Coca-Cola (KO), Chevron (CVX), and Intuitive Surgical (ISRG). Discover more stocks enjoying a Strong Buy rating at https://stocknews.com/best-stocks/.