This has felt like an interesting earnings season so far, and one that has prompted some serious, almost philosophical questions. The calendar Q4 reports that we have seen since yesterday’s close have only enhanced that feeling. It has been a season of contradictions in many ways, with companies often beating lowered expectations for the holiday quarter, but with CEOs decidedly divided on what is to come. Some have talked about the possibility of a recession, while others have studiously avoided the "R" word and offered upbeat outlooks. There is always a variety of results and opinions in earnings season of course, but some kind of theme can usually be discerned. Not this quarter.
This quarter, even individual results can often send conflicting messages. Take Lowe’s (LOW), for example. The nation’s second biggest building supplier and home renovation materials company behind Home Depot (HD) beat expectations for EPS and revenue but also reported a more than 6% drop in comparable sales. They also cut their guidance for the rest of the year significantly, bringing it well below the median forecast. The story is essentially one of a company doing well in difficult circumstances and being cautious about the future. However, that is evidently not enough for traders.
LOW is trading lower in this morning’s premarket. That may well be a bit of an opportunity for investors because there is evidence that the supply shortage that has impacted the housing market is easing. Both housing inventory and existing home sales increased in January, bringing those numbers up above their levels at the same time last year, suggesting that homeowners are getting over the initial shock induced by mortgage rates rising so fast. When people get ready to move or when they buy a new home, they renovate.
So, increased housing inventory and more moving means more business for Lowe’s. Therefore, while Lowe’s negative outlook may be justified by current conditions, a more positive trend just may take hold in the spring. As a result, buying LOW on any earnings related weakness makes sense to me.
Another opportunity for investors came this morning after Zoom Communications (ZM) reported. This, however, isn’t another example of a stock dropping on earnings after a disappointing element to the report. Zoom killed it in just about every way: They beat expectations on the top and bottom lines, issued guidance above Wall Street’s consensus view, and announced a stock buyback. The stock has jumped around 10% in the premarket as a result of all that, but still looks very cheap when you look at the long-term chart:
The massive spike upwards that stands out was, as I’m sure you are aware, a consequence of the pandemic, and it is a classic example of traders overreacting to immediate conditions. When we were all stuck at home, videoconferencing was, for many, their only form of human contact, and Zoom was just about the only option for us all at that time. Eventually, and predictably, both of those things changed. The lockdown ended and a gradual return to in-office work began, while competition in the video conferencing space came, including from some scary places like Microsoft (MSFT) and Google parent Alphabet (GOOG, GOOGL).
As so often happens in markets, though, an overreaction in one direction was followed by an overreaction in the opposite way. ZM dropped to below where it was in 2019, before the pandemic. Unfortunately for those who bought high, they got burned when there was a rush to exit the stock. I also understand that the new competition from Microsoft, et al, changed the landscape, and that Zoom took time to adjust to those changes. However, even though many workers are returning to the office, the working environment has been fundamentally changed around the world, with many still working from home for at least a few days each week.
Videoconferencing is now the norm rather than the exception and, even if you work from home only two days a week, your company still has to have an account that you can use for that. It should come as no surprise, then, that Zoom’s great quarter was built on increased enterprise revenue, which tends to be sticky, offering Zoom a good opportunity for growth.
This has been an earnings season of contradictions, and that continued this morning, but with a common theme. The two standout earnings reports each make the stocks concerned attractive, but for completely different but weirdly connected reasons. LOW is attractive on a drop because that drop is based on immediate factors rather than outlook, while ZM is jumping but is attractive because it once showed the same kind of overreaction to immediate conditions, then pulled back too far.
I suppose the lesson here for investors in general is not to get too carried away with the present. For long-term investors, yes, current conditions matter, but only in the context of what has come before and what will come in the future. Traders don’t think that way, however. They are concerned only with the here and now. That disparity of time horizons can create opportunities for those that can detach themselves from conventional wisdom and can see what is happening now as a function of what has come before, and as a precursor of what is to come. If you can do that, you will see that both LOW and ZM are buys after their earnings and the fact that that is for very different reasons is in keeping with this quarter’s trend.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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February 27, 2024 at 09:34PM
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Both Lowe's (LOW) and Zoom (ZM) are Buys After Earnings, But for Very Different Reasons - Nasdaq
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