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Judgment Day for Stocks: Third-Quarter Earnings Report Card

Louis BaseneseIt’s report card time.

Roughly 1,100 companies have reported third-quarter earnings.

The data, so far, suggest that the market has reached the upper limit on prices.

Companies that miss analysts’ expectations are down 3.3% in the two days following the earnings announcement. Such a two-day decline is over a full percentage point more than the historical norm.

The reverse is happening, too.

That is, companies beating expectations are up 0.3% in the two days following the earnings announcement. The historic norm is a 1.2% rise in price for companies that “beat.”

It’s definitely worth keeping an eye on.

Today, though, we’re handing out grades.

Who made the honor roll?

Who’s being disruptive?

And who just flunked out?

Let’s find out…

Honor Roll Goes To…

Jonathan RodriguezMany people are asking… when will this ripping eight-year bull market come to a close?

The answer is much simpler than you think: when earnings stop rising.

Aside from central bank liquidity, no other force in finance has a bigger effect on a stock’s price.

But from what we’ve seen so far, the earnings growth train isn’t stopping — or even slowing down — anytime soon.

According to FactSet, 81% of firms in the S&P 500 have reported third-quarter results. And so far, 74% of companies have beaten estimates.

Better still, 66% of S&P constituents have beaten sales estimates, too.

Plus, with a major U.S. corporate tax rate cut on the horizon — which will ultimately boost bottom lines across the board — the sky’s the limit for forward profits.

So who made the honor roll this quarter?

Drum roll, please…

The tech sector (with flying colors).

FactSet notes that a whopping 90% of tech names have beaten earnings estimates — and the sector is currently boasting a 19% growth rate from the same period last year.

The FAANG stocks (Facebook, Amazon, Apple, Netflix and Google) all soared after crushing their third-quarter reports.

But the highest honors go to the semiconductor industry…

So far, semis sport an annual third-quarter earnings growth rate of 44% — the highest of any other tech industry, according to FactSet.

Because their growth has been so strong all year, many of these names are selling off as investors take profits.

If you haven’t already loaded up on semi stocks, use the post-earnings dips to make your move.

As I’ve noted all year, I expect chipmakers to keep on rolling — well into 2018.

The Worst of the Worst

Martin HutchinsonThere were a lot of pretty juicy flunkies this quarter. Perhaps this is a sign that the record-low volatility in the market isn’t reflecting the real economy.

Let’s review some of the worst now…

The biggest blooper came from General Electric (NYSE: GE). Earnings came in at 29 cents per share when the market had been expecting 49 cents.

This sent the stock into a tailspin. Shares sold off 20% as investors worried about the dividend.

Like many big companies, GE has been buying back shares like a maniac in recent years. And with the stock below $20, down nearly 40% this year, that clearly wasn’t a smart move.

Another big loser was American International Group (NYSE: AIG). It lost $1.91 billion in the third quarter, far worse than forecast.

Granted, the hurricanes during the last quarter hit insurance companies hard. Still, the losses were more than double Wall Street’s expectations.

Wayfair (NYSE: W) was a dud this quarter, too. The stock fell 16% on a loss of 65 cents per share.

It’s no surprise that losses were expected this quarter — considering the company always loses money and it’s competing directly with Amazon (NASDAQ: AMZN).

Yet somehow the stock is still up 65%. And shares will likely recover soon from this quarter’s dip as the company’s blind acolytes recover their faith.

The award for worst flunkie of the quarter, however, goes to Tesla Inc. (NASDAQ: TSLA).

The company lost $619 million in the quarter, which was more than expected. And it revealed that it was only able to produce 260 of its “mass-market” Model 3 vehicles. A problem in its battery Gigafactory was to blame, which took management a month to identify.

Making matters worse for Tesla, President Trump’s new tax plan includes the removal of a key electric car subsidy, according to the IRS.

The stock is down $22 Friday, which created an early Christmas for bearish investors. But Tesla is still up 32% on the year.

Talk about a tribute to the power of positive thinking!

Disruption Is Key

Louis BaseneseWith stocks raging higher for over eight years now, how can investors book the biggest gains at this late stage of the bull market?

Simply invest in companies enjoying the most rapid sales and earnings growth.

Such companies promise to rise the farthest (and longest) because there’s obviously some disruptive force at work in their business model that’s unlocking the unparalleled growth.

Take Cognex (NASDAQ: CGNX), for example.

The company is the world leader in the machine vision industry.

Its systems help customers speed up production (higher efficiency), minimize defects (higher quality) and reduce costs (higher profitability).

What’s more, they’re increasingly being used in a variety of end markets — including consumer electronics, automotive, consumer products, food and beverage, medical devices, pharmaceuticals, and logistics (package sorting and distribution).

In short, Cognex represents the purest play on one of the fastest-growing tech sector trends: robotic automation.

Consider the statistics:

  • The global industrial robotics market is worth nearly $11 billion today. And it’s expected to grow at an annual rate of at least 21% per year.
  • The Boston Consulting Group predicts that “the share of tasks performed by robots will rise from a global average of around 10% to about 25% across all manufacturing industries” by 2025. It’s easy to see why. As BCG notes, “An attractive return on investment is possible for replacing manual labor with machines on a wide scale.” The savings promise to be substantial, too — as much as 33% in some industries by 2025.

It should be no surprise, then, when you find out that Cognex continues to put up record-breaking results. Candidly, I’ve never seen a company use more exclamation points in official press releases.

“What a spectacular quarter!” exclaimed Dr. Robert J. Shillman, founder and chairman of Cognex, in the release covering the company’s third-quarter results.

Like I said, this is the norm, not the exception.

In the same quarter a year ago, for instance, Shillman exclaimed, “What an outstanding quarter!”

It’s the norm for Cognex to keep talking about “record” results quarter-in, quarter-out, too.

Per this quarter’s press release, “Cognex reported record-breaking revenue, net income and earnings per share that far exceeded the prior records set just last quarter. And we were extremely profitable.”

A quick glance at the company’s stock chart over the last two years tells you all you need to know about the impact of holding a disruptive business in your portfolio. Shares are up a staggering 280% (and counting).

To put that into perspective, this single stock delivered more gains in two years’ time than you could have generated by investing in the S&P 500 for the last 8½ years, since the bull market officially began.

The trick, of course, is identifying these companies early, which is precisely what we do every month for True Alpha subscribers.

Yes, Cognex was an official True Alpha recommendation. And it’s now a big winner.

Now we’re getting ready to share our research on another disruptive company. Sign up here to make sure you’re on the list to find out its identity before it’s too late.

Ahead of the tape,

Louis Basenese
Chief Investment Strategist, Wall Street Daily