The week of contagion anxiety continues as we see more worldwide coronavirus patients and corporate profit warnings. Today looks like another rollercoaster a-brewing . . . but the ongoing earnings season is helping investors identify relative strong spots.
We'll digest the 4Q19 numbers from Anaplan (PLAN) and CBRE (CBRE) as the day goes on. However, the odds are strong that they'll drift with the flow until the market is ready to come back and calmly appraise what each stock is worth now. As long as the sellers are in control and higher-profile companies dominate the discussion, good news will find it hard to get traction.
It's clear now that the market isn't happy with Washington's nebulous and somewhat ambivalent plan for dealing with the virus and its economic impact. New cases are being reported, visibly unnerving local authorities in San Francisco and elsewhere. And with Microsoft (MSFT) now warning that sales of Windows-driven computers (36% of overall revenue) are tracking lower than anticipated, it's clear that economic activity is feeling the chill. On that basis, the hit to GDP best resembles a particularly vicious winter . . . delayed sales will come back when the outbreak recedes, leaving most stocks on their bullish long-term trajectories.
One just has to get there first. The Airlines in particular are suffering. We don't recommend these stocks. Technology companies that facilitate communications and commerce without bringing people into face-to-face contact stand to prosper in the long run, even if the stocks retreat here. But there are hints of the almost-universal correlations we've seen this week breaking up to let some strength emerge. Yesterday we saw only 65% of the S&P 500 drop, which is a lot better than the 98% declines we endured Monday. A full third of the market wants to bounce from here. That's progress.
In the meantime, of course, it's been a grueling week. Our universe and the S&P 500 are both down roughly 7%. The safe havens of our High Yield portfolio are down 3%, which shows that some investors are dumping less indiscriminately. There is little thought to the companies that will endure an economic slowdown and which are truly vulnerable. That's a good sign. When defense capitulates, the market storm is on its way back out.
Look at Square (SQ), up 7% overnight because people can still recognize a good quarter and realistic guidance when they see it. Revenue of $620 million blew our forecast and management's outlook out of the water, giving us a healthy 33% top-line growth to work with. The additional sales translated into $7 million more profit than anticipated, which turns into total earnings of $0.23 per share. We were expecting $0.21.
On the Silicon Valley "Law of 40" scale, that's a clear win, with an 18% margin added to 33% sales growth adding up to a lot more than the 40% that venture capitalists consider a healthy and desirable investment. And while guidance for the full year is a little conservative, the current quarter is shaping up stronger than we expected. It's going to take a lot of fear to keep a company like this down.
And we've got one more earnings report to look forward to tonight.
Earnings Preview: Occidental Petroleum (OXY: $34, down 19% this week)
Earnings Date: Thursday, 5:00 p.m. ET
Revenue: $6.5 billion
Net Loss: $71 million
Year Ago Quarter Results
Revenue: $4.8 billion
Net Profit: $922 million
Implied Revenue Growth: 35%
Implied EPS Growth: flip to a loss
Sell Price: $41 (temporarily suspended)
Date Added: January 16, 2020
BMR Performance: -27%
Key Things To Watch For in the Quarter
Big Oil stocks like Occidental are now below where they were in the depths of the 2008 crash. To call the decline "overdone" is an understatement. There's a clear reason why the company has dropped over the past year . . . oil is down 10% and it's hard for the Energy majors to make money under these conditions. But the fall is exaggerated and there's room for substantial upside when the commodity cycle turns back in our favor.
In our view, oil will come back. U.S. shale production is showing signs of peaking and while Chinese consumption growth has slowed in the outbreak, a slowdown doesn't mean demand has fallen over a cliff. The fundamentals may weaken in the near term, but the long view still points up.
For now, these numbers are unlikely to matter. Occidental will come back when the oil market tells stock investors that these stocks are safe again. Until then, it's all about booking dividends for at least a few quarters before year-over-year comparisons look better. This is probably going to be the only season the company operates at a loss, which makes this the bottom in terms of the fundamentals. There's enough cash and marketable investments on the balance sheet to cover that loss and pay shareholders $9.32 per share before profitability resumes.
We're not banking on that windfall dividend because we know management is far from desperate. Even maintaining $0.79 per quarter gives shareholders a robust 9.2% yield, which is more than enough to justify a little patience. Remember, Warren Buffett himself counted himself lucky to lock in 8.0% in his $10 billion investment in Occidental. Those who buy this dip can do even better than the Sage of Omaha himself.