Despite most of what you have been hearing, earnings season has started on a positive note, particularly in terms of profits relative to expectations. Positive surprises have outnumbered disappointments by almost 12:1. The median firm has reported year-over-year growth of 14.4% and has topped expectations by 3.9%.
Several companies have come in a bit light on revenues, or have made somewhat downbeat comments about the outlook for either the third quarter or the second half. However, if a firm reports inline earnings, but lower than expected revenues, by definition it means that margins are better than expected. It is not intuitively clear to me that that is all bad.
So far, estimate revisions have also been holding up nicely. More estimates have been raised than lowered over the last month for 2006. While the revisions ratio has been dropping in recent weeks, it remains positive. The perennial leaders, Energy, Industrials and Materials remain strong. Interestingly the Consumer Staples sector, a traditional safe haven in times of trouble, has been showing signs of strength. As for the downside, the fact that Tech rhymes with wreck, is not just a coincidence right now. Health Care, which has been weak on the estimate revisions front for several months now, remains so.
Keep close eye on earnings. Look at ILMN today, up 5.64 pre market due to good earnings. Like this you should find 20-25 good set ups during earning period which make 40% plus move in the post earning quarters.
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