We are entering the heart of earnings season with bellwethers from most every industry opening their kimonos wide, says Steve Reitmeistereditor of Reitmeister Total Return.

The better the results from these earnings reports, the greater the catalyst for the overall market to press to new highs. Conversely, poor results would put a fork in this latest rally with stocks likely retreating from current heights. Nine of the last 10 sessions have been positive for the stock market. This has helped stocks put the recent pullback to rest and quickly pressing to new all-time highs intraday Tuesday @ 4,598.53.



We have spoken at length in this commentary that the recent pullback was just a natural process of investors taking a rest after another long bull run. So it was prudent to keep our portfolios aligned with the primary bullish trend so we would accrue the full gains whenever the bull reawakened from its temporary slumber.

Indeed it seems that the early positive results from Q3 earnings season was the main catalyst that acted as an alarm clock to investors to wake up and buy stocks once again. This makes sense when you realize that 83% of the early reporters have beaten estimates. That is a nice spot above the normal level of quarterly surprises. Also important is that 79% of the companies beat on revenue as well.

As any accountant will tell you, earnings are easy to manipulate, but not true with revenue. That is why its vital to see a company beat on both levels.

For as good as the above is, I need to share this note of caution from earnings experts like Nick Raich of EarningsScout.com. He is concerned that these beats are also coming with a higher-than-usual rate of declining earnings estimates for the future because of concerns about inflation and supply chain.

Both Nick and I learned the importance of earnings estimate revisions with our time at Zacks Investment Research. However, I think Nick is being a tad overly sensitive as the size of estimate declines is very small. Second, with interest rates this low it doesn’t take much for investors to appreciate that stocks are the much better value than bonds or cash.

This point, as I have shared 107 times this year, is the key behind the recent bull market. Truly, it would take 10-year rates pressing above 3% to start pondering when investing in stocks becomes less attractive making us consider more defensive strategies in our portfolios. We are nowhere near that level so best to align with the prevailing bullish trends.

Now let’s turn to the recent economic reports to see what it tells us.

Jobless Claims last week came in under 300,000 for the second straight time. Less jobs lost typically means more jobs gained, which should show up next week in the monthly ADP and Government employment reports.

Three regional manufacturing reports all came in at healthy levels increasing the odds that ISM Manufacturing will show national manufacturing is also clipping along at a healthy pace. Most impressive of this bunch was Philly Fed at 23.8. Dallas Fed at 14.6 showed a nice increase from 4.6 in the previous report. Lastly was Richmond Fed came in at 13, which erased the -3 blemish from last month.

The PMI Flash report on Friday showed healthy signs across Services, as well with a 58.2 showing up from 54.9 last month. And yes, Manufacturing is looking even more impressive at 59.2.

As shared many times in the past, these reports use 50 as a center line. Below that is a sign of contraction. Above that is expansion. Most of the time the economy hovers between 53 and 55. So anything above that should be viewed as impressive improvement. Indeed, that is what it says now, which only helps to bolster the case for future economic expansion and earnings growth.

Lastly, let’s talk about the gain in Consumer Confidence appearing in the 113.8 result Tuesday versus 109.8 previously. Many people have been concerned about the consumer as some other reports show them becoming increasingly alarmed with rising inflation. But often that is an immediate reaction and as things settle in it becomes not such a big deal. That is likely what we see happening in the Consumer Confidence reading.

Add it all up and right now it is still wise to stay bullish. That is why I advocate a 100% invested stance in our portfolios to not miss a beat as the profits unfold.

Once again, the POWR Ratings is pointing the way to stocks ready to outperform. The specifics on that are on full display in the section that follows...

Portfolio Update

Our portfolio has beaten Mr. Market for six of the last seven sessions. In that span we have enjoyed a tidy margin of victory: +3.21% for RTR vs. 2.31% for the S&P.

And yes, it further stretches our lead on the year to +34.88% for our portfolio vs. 21.80% for the S&P.

Now what really matters is how our companies do during earnings season. Here again, is the updated calendar of when our companies are supposed to report: (a = after market close / b = before market open):

10/26 a-BYD, 10/27 b-VRTS, 10/28 b-SNDR, a-EMN, 11/1 a-CRUS, a-NSP, 11/2 a-ATVI 11/3 a-APA, 11/4 BABA, a-DBX, 11/18 BBY, 11/23 KLIC.

First up was BYD. That will be followed by insights on other positions in our portfolio:

Boyd Gaming (BYD): Great news coming into the 10/26 earnings report. And that is the 5-star analyst from Morgan Stanly couldn’t wait for the report to pound the table on the stock with a target raise to $90. This is very strong foreshadowing that his channel checks point to strong results, which increases odds of a beat and raise on the way.

And how did it turn out?

$1.30 actual earnings vs. $1.25 expectations is a solid beat along with revenue topping estimates as well. However, the initial reaction of investors shows a 1-2% decline for shares after hours.

Why? Probably because the last couple quarters had monstrous beats of 71% and 111%. So, this seems quite tepid by comparison. Yet the very nature of a company blowing away expectations is for analysts to be less conservative with expectations in the future. So, I see no shame in this result. Especially as management just initiated a new $300 million share buyback which is a STRONG statement that they see tremendous value in shares and are happy to use excess cash to buy BYD shares on the cheap. We should heed that signal by holding on expecting more upside ahead. Especially true with most analysts believing fair value is $85-90.

Kulicke & Soffa (KLIC): The bounce from bottom continues with a big tally on Thursday at +6.32%

Why is KLIC bouncing?

The better question is why the HECK not?

Meaning that this stock was always worth $80 to $100 because chip demand is soaring at the same time there is a shortage of chips leading to one of the largest times of investment in chip production which CLEARLY benefits KLIC.

This, my dear friends, is why I whole heartedly DISMISS the idea that price action is truth. Sorry if that offends any of the TA/chart folks on this list. These ideas of price being reality are only truly for a fleeting period...but tells you little of where the stock will go next. That is where fundamentals are MUCH more reliable over time. And the POWR Ratings is our best way to tap into that.

Insperity (NSP): I would have laid at bet in Vegas that NSP was going to hang out below $120 into their 11/3 earnings report. However, it broke above that mark last Monday and has since risen to $125 yesterday before a minor sell off Tuesday. Trust me...I am happy to be wrong on this one ;-)

Clearly this upward move is a sign that other investors know that employment trends are positive, which should lead to yet another attractive beat and raise report on Monday. +57% and counting!

Rates on the Move (KRE & TBT): 10-year rates were on a strong run from early August til last week. Now I see a bit of consolidation around 1.6%. Yet still believe that 2% will be in hand early in 2022.

Gladly our new regional banks ETF trade got in the swing of things last Wednesday with a strong outperformance of +2.6%. It’s a surprisingly volatile group for how stable we generally think of banks. But the beauty of volatility is that when it's in your favor you enjoy tremendous outperformance. So hopefully more of that is in store as rates make that journey up to 2% (and likely 3%+ 12-18 months from now).

Activision vs. Eastman Chemical (ATVI & EMN): Yes, in general these are two stocks that investors wouldn’t compare to each other. However, in our case, they were two trades that were released on the same day to RTR members (10/6/21).

EMN was hot out of the gate and seemed like a runaway success. However, ATVI is finding its stride this past week and has taken a modest lead. I sense it may be the case that investors are searching around for holiday season winners. Thus, with all the hub-bub about the supply chain I suspect that others are coming around to our way of thinking that video game companies, which normally do very well during the holiday season, could be outsized winners this year because of the supply constraints and shortages in other products.

Note that EMN will report earnings on Thursday after hours. And ATVI is due next Tuesday after hours. Hopefully both keep up with their beat and raise traditions to keep these shares on the ascent.

Best Buy (BBY): Shares started the month as low as $103.42. Gladly they shook off that slumber with an impressive rally up to their current perch at $121.23. I think similar to Activision, investors are pondering who will do well this holiday season. Hard not to picture Best Buy as a winner during this vital shopping season. If true, then likely more presents to unwrap with these shares coming down the homestretch of the year.

APA Corp. (APA): Analysts are not waiting for their 11/2 earnings report to confess their love for these shares. In the past month there have been several target prices raises including a fresh $45 Tuesday. This comes along with 18 analysts raising earnings estimates for the current quarter. This makes perfect sense because no doubt with fuel prices surging, then the estimates created two-three months ago were way out of date. But for as good as all that extra analyst attention normally is...the only thing that really matters is where energy prices head next as that will move share prices the most. So far, all those signals are in our favor, which is why we continue to hold expecting even greater gains.

Virtus Investment Partners (VRTS): Stock market making news highs = VRTS making new highs. Wednesday morning earnings is the next hurdle. Anything resembling the beat and raise from last quarter, and we will be sprinting above $350 shortly with $400 a possibility before the next quarterly earnings announcement.

Schneider National (SNDR): They report earnings 24 hours after VRTS. Investors clearly have no worries about what is in store as shares raced up to $25 into the report. This was a very delayed reaction to a truly exceptional earnings announcement last quarter. Let’s hope that investors react in more timely fashion if SNDR impresses once again this quarter.

Closing Comments

BYD hopefully has us off to a good starting this earnings season (the immediate 5% decline on the news is now whittled down to less than 1%...and likely the result is positive a week from now as analysts point out the positive growth in their business).

Let’s hope that is a portent of more good things to come this earnings season. NOT that it will be all rainbows and lollipops...that is simply not in the cards. However, if we can get two or three winners for every loser, then we will come out well ahead in the end.

Learn more about Steve Reitmeister at StockNews.com.