Schaeffer's Trading Floor Blog

Blue-Chip Earnings Preview: McDonald's Corporation, United Technologies Corporation, and Microsoft Corporation

Taking a closer look at MCD, UTX, and MSFT ahead of their earnings reports

by 7/21/2014 11:43 AM
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Blue-chip earnings will be in focus this week, with a number of Dow components slated to take the stage. Kicking things off bright and early tomorrow morning will be fast food giant McDonald's Corporation (NYSE:MCD) and aerospace issue United Technologies Corporation (NYSE:UTX). Meanwhile, software concern Microsoft Corporation (MSFT) is scheduled to unveil its results after Tuesday's close. Here's a quick look at this trio of names as earnings approach.

  • Over the past eight quarters, MCD has missed analysts' bottom-line expectations five times, resulting in an average single-session post-earnings loss of 1.5%. For the company's second quarter, Wall Street is calling for a per-share profit of $1.44 -- a 6-cent improvement over MCD's year-ago results. Ahead of tomorrow's report, MCD is fielding a fundamental folly -- and over the weekend, issued an apology to China for its questionable meat supplier on the mainland. At last check, the stock was down 1.1% to trade at $97.92, and could be poised to extend this decline, should a poorly received earnings report spark a re-evaluation of ratings among analysts. At present, McDonald's Corporation's 12-month price target of $106.69 stands in territory yet to be charted, and not a single one of the 26 covering analysts maintain a "sell" or worse suggestion toward MCD.

  • UTX is down 0.8% to trade at $112.69 today, due in part to broad-market headwinds. The stock could be poised to pare a portion of these losses in the near term, should UTX's post-earnings history repeat itself. After exceeding consensus earnings estimates in each of the past eight quarters, the security has gone on to average a gain of 0.3% in the subsequent session -- which widens to 0.4% when going out one week. For United Technologies Corporation's second quarter, analysts are expecting a profit of $1.71 per share -- one penny more than what the company earned last year. On the charts, UTX has been testing support atop its 200-day moving average in recent weeks, but today's pullback has the stock trading south of this trendline, which is currently located at $113.27.

  • MSFT has been a standout on the charts in 2014, with the shares up nearly 19% to trade at $44.51. Over the past three quarters, the stock has performed well in the wake of its bottom-line wins, and has averaged a single-session post-earnings pop of 2.7%. Another well-received quarterly report could have more brokerage firms jumping on the bullish bandwagon. Currently, 68% of covering analysts maintain a "hold" or "sell" suggestion on the outperforming equity, while the consensus 12-month price target of $43.52 stands at a discount to Microsoft Corporation's current price.

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Buzz Stocks: EMC Corporation, Hasbro, Inc., Reynolds American, Inc., and General Motors Company

Today's stocks to watch in the news are EMC, HAS, RAI, and GM

by 7/21/2014 9:29 AM
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U.S. markets are signaling a slower start this morning, as geopolitical concerns weigh on investor sentiment. In company news, here are some stocks to watch today:

  • Elliot Management Corp. announced over the weekend it has taken a more than $1 billion stake -- or roughly 2% -- in EMC Corporation (NYSE:EMC). By becoming EMC's fifth-largest shareholder, the hedge fund is hoping to convince the data storage supplier to spin off VMware, Inc. (NYSE:VMW) -- of which EMC holds an 80% stake. (MarketWatch)

  • Hasbro, Inc. (NASDAQ:HAS) has teamed up with 3-D printing firm Shapeways to allow fans of My Little Pony to design figurines of their favorite characters. While HAS is initially starting with five chosen artists, the company is hoping to expand its roster down the road, as well as include additional brands and materials. The news comes in conjunction with Hasbro's second-quarter earnings results. (The New York Times; FOX Business)

  • A jury in Florida on Friday slapped R.J. Reynolds Tobacco Co. -- a subsidiary of Reynolds American, Inc. (NYSE:RAI) -- with $23.6 billion in punitive damages in a lawsuit filed by a woman whose husband died of lung cancer. In response, an R.J. Reynolds Tobacco Co. exec said, "We plan to file post-trial motions with the trial court promptly, and are confident that the court will follow the law and not allow this runaway verdict to stand." (USA Today)

  • A filing released on Friday revealed that General Motors Company (NYSE:GM) vehicles made prior to 2003 may have been serviced with faulty parts, as a result of mislabeling after the company redesigned ignition switch parts in 2003 and 2004. However, while older parts were potentially used to replace the ignition switches, a GM spokesman said, "nothing in our data suggests that there is a danger out there." (Reuters)

  • Also, reporting quarterly earnings were Allergan, Inc. (NYSE:AGN) and Halliburton Company (NYSE:HAL). (MarketWatch)

  • Finally, McDonald's Corporation (NYSE:MCD) and Yum! Brands, Inc. (NYSE:YUM) have issued apologies to consumers in China, amid speculation that one of their suppliers on the mainland was providing their chain restaurants with expired meat. The supplier -- Shanghai Husi Food Company, owned by Illinois-based OSI Group -- has since been shut down. (Marketplace)

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Analyst Downgrades: GoPro Inc, The Coca-Cola Company, and Fifth Third Bancorp

Analysts issued bearish notes on GPRO, KO, and FITB

by 7/21/2014 9:14 AM
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Analysts are downwardly revising their ratings today on photo equipment firm GoPro Inc (NASDAQ:GPRO), blue-chip beverage concern The Coca-Cola Company (NYSE:KO), and regional lender Fifth Third Bancorp (NASDAQ:FITB). Here's a quick look at today's bearish brokerage notes on GPRO, KO, and FITB.

  • GPRO garnered a slew of new analyst ratings today, most of which fell on the lukewarm end of the spectrum. Barclays, Baird, Stifel, Citigroup, and Raymond James all started coverage of GoPro Inc with the equivalent of a "hold" rating, while J.P. Morgan Securities took the lonely bullish road by offering up an "overweight" recommendation. Despite the rather tepid wave of brokerage notes, GPRO is set to open 2.7% higher this morning. The stock closed Friday at $41.43, but has consistently encountered pressure in the $44 region since early July.

  • Societe Generale downgraded KO to "hold" from "buy," sending the stock down 0.6% in pre-market action. Shares of The Coca-Cola Company have gained just 2.7% year-to-date, but that's roughly in line with the 3.2% advance by the broader Dow. At $42.43, KO would need to rally nearly 6% to live up to analysts' consensus 12-month price target of $44.91.

  • FITB was hit with another dose of negative analyst attention this morning, with KBW cutting its price target to $22 from $24, and Nomura lowering its target to $22. (On the other hand, Baird upped its rating on Fifth Third Bancorp to "outperform" from "neutral.") FITB finished Friday at $20.45, bouncing back a bit from the previous session's post-earnings plunge -- and the stock has added another 1.1% in electronic trading this morning.

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Analyst Upgrades: JPMorgan Chase & Co., Goldman Sachs Group Inc, and Morgan Stanley

Analysts upwardly revised their ratings on JPM, GS, and MS

by 7/21/2014 9:09 AM
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Analysts are weighing in today on financial heavyweights JPMorgan Chase & Co. (NYSE:JPM), Goldman Sachs Group Inc (NYSE:GS), and Morgan Stanley (NYSE:MS). Here's a quick roundup of today's bullish brokerage notes.

  • JPM scored a double dose of upbeat analyst attention this morning. Nomura lifted its price target on the blue chip to $64 from $62, and FBR upgraded the stock to "outperform" from "market perform" while lifting its price target to $70 from $55. On the charts, JPMorgan Chase & Co. is hovering just shy of its year-to-date breakeven at $58.48, which has acted as a technical speed bump on several occasions in 2014. JPM closed at $58.23 on Friday.

  • Nomura also offered its two cents on GS, upping its price target on the equity to $168 from $158. The new target still represents a discount to Goldman Sachs Group Inc's Friday close at $171.47, and it's a considerably more skeptical view than the consensus. Currently, the average 12-month price target on GS stands at $176.70 -- not far from the stock's January 2014 multi-year high of $181.13.

  • MS also received a Nomura price-target hike, with the brokerage firm upping its forecast to $37 from $36. Morgan Stanley shares settled at $32.64 on Friday, so the analysts are banking on upside of more than 13% from the equity's current perch. To put that outlook in perspective, MS has gained only 4.1% so far in 2014, but the shares have rallied 18.3% on a year-over-year basis.

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What to Make of the 'Overbought' VIX

Last week's VIX spike was pretty tame, relatively speaking

by 7/21/2014 8:49 AM
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Don't look now, but we have an "overbought" CBOE Volatility Index (VIX)!

... Well, we had an overbought VIX, briefly. I use the VIX closing 20% above its 10-day simple moving average as my strict objective definition of overbought, and we got there on Thursday.

So, let's update the table we just ran a couple weeks ago on overbought VIXes since July 2009.

SPY Performance After a VIX Breakout

Just to refresh, this table shows all 16 instances of my definition of an overbought closing VIX since the beginning of July 2009. I also included the SPDR S&P 500 ETF Trust (SPY) return if you held for one month and for three months. At the bottom, I show the mean and median returns, as well as the returns if you just randomly bought and held for one or three months.

Obviously, we don't know yet how this latest VIX pop plays out, but it's certainly off to a good start. Friday's rally just about offset Thursday's dip. Maybe that was a fake out or a squeeze, and we dip again or maybe Thursday was just a head fake.

It's not too early to make some observations, though.

The overbought VIX came almost right on schedule, to the extent this sort of thing has a schedule. It's tough -- and pointless -- to guess when exactly it's going to happen, but we can safely say it's an event we see about three times a year or so. And given that it was nearly half a year since the last blast, it was simply time.

The ostensible cause was the tragic Malaysia Airlines jet crash, specifically, and global unrest, generally. But a better way to look at this is that the market was due for a shakeout anyway, and this was merely the catalyst. If you like historical parallels, see the April 15, 2013 overbought VIX the day of the Boston Marathon bombing.

Both events are tragic, both understandably get investors a bit scared and cautious, but ultimately, neither is likely going to lead to the end of any long-term move. Quite simply, we all collectively have the attention span of fruit flies. One day, every story on financial news is about the sad events, and every pundit and everyone with a Twitter account is an expert on the subject. And then a day or maybe a week or two later, no one cares, at least as far as investing goes.

Ukraine's not getting resolved any time soon. Nor is Gaza, to name last week's other notable unrest. And neither is going to affect investing all that much over time.

To me, the surprise was that we turned around so quickly, and on a Friday no less. Often, investor fears run rampant going into three days of uncertainty. Not so much this go-around.

As for the VIX itself, this marks the lowest absolute level for any of these recent "overbought" events. In fact it's the lowest by a lot, 14.54 vs. 17.27 in April 2013. The median of all VIXes since July 2009 is 17.81, so we're considerably below a typical VIX reading in a low-VIX regime. In other words, "overbought" hardly equals panic right now anyway.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.

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