Stock Market Trends: Can Earnings be the Dragon Warrior needed to Slay the evil OIL Villain?
The Dow continues to jump back and forth, over and under the 12,200 support level. With yesterday’s selloff, it is below the line in the sand, again. Clearly oil prices going up, up, up… is the driving factor behind the market’s demise. Tuesday’s 1.4% jump in wholesale prices for May didn’t help investors find much enthusiasm either.
All is not lost here as the NASDAQ, NYSE and the S&P 500 are all still trading above their respective levels of technical support. As long these indexes hold up and the Dow is off marching to its own drummer, the downside should be fairly limited. If all of the indexes eventually end up closing under their support levels, that type of confirmation would mean we are paying a visit to the March lows.
We are still of the mind frame that late June-to-early-July is when the intermediate bottom will be hit, just in time for the 2nd quarter earnings season to get started. Hopefully Goldman’s, Adobe’s and Best Buy’s results are a preview of what is to come. All 3 of these industry leaders posted better than expected earnings. We know all 3 managed to lose ground despite the good news, but if 2nd quarter earnings prove to better than Wall Street expects, stocks will have to move up. Earnings are the lifeblood of higher stock prices.
In the meantime, we highlight a short candidate for these troubled times.
All is not well in Hershey (HSY), Pennsylvania. The chocolate and confectionary maker has run into some hard times of late and its stock has suffered as a result. It is trading near a 52-week low in the mid-$30’s and looks to be heading lower. Yesterday the company just cut its long-term growth target to 6-8% from a previous goal of 9-11%. The stock fell a few percentage points on the news.
The soaring price of commodities is hurting the American icon’s bottom line. CEO David West commented that 2009 will be challenging due to rising input costs in an analyst meeting in New York. Specifically, cocoa is the main culprit. The company is evaluating its cost structure to determine what the best course of action is. Obviously this means that price increases could be on the way.
Hershey has had a tough time managing earnings expectations of late as it has missed three quarters in a row by an average of about 4%. That is not going to please investors on Wall Street. 2009 earnings estimates have been cut by six cents to $1.93 per share over the past three months. This would only represent 6% earnings growth over this year. A 6% growth rate probably isn’t enough to support a P/E of 18x expected earnings. We believe there is room for the P/E to contract.
The sweeping changes that are happening in the management will take time to show up in the company’s results. It is an excellent brand and will survive long term, but there are some rocky times ahead. We see the stock heading towards $30 during the next 3-to-6 months.
Suggested Stop:$37.83
Tags: analysts' expectations, beating earnings, cal options, call, earnings, earnings announcements, missing earnings, option, put, put options, Stock Picks, trade on earnings, Trading Earnings, Trading Ideas, upside surprise, wall streets expectations
