Sensible Investing

As the earnings season draws to a close, more companies reported their earnings the last few days.  Among the companies that I follow, Nvidia (NVDA), Activision (ATVI), Marvel Entertainment (MVL), Akamai (AKAM), Buffalo Wild Wings (BWLD) beat expectations, while Garmin (GRMN) and Blackboard (BBBB) fell short.

Overall, this earnings season turns out to be significantly tamer than many feared.

Today, electronics retailer Best Buy reported a drop in its profits, but at the same time provided guidance that exceeded Wall Streets estimates.  As a result, its stock rose substantially and contributed to the advance in the overall market.  The fact that Best Buy sells consumer discretionary goods and its better outlook indicates that consumer spending decline is at least moderating.

Today, Netflix reached an all-time high of $42 per share.  This is a quite remarkable achievement in today’s market.  Please refer to my earlier post in January about Netflix earnings.

The leading GPS maker Garmin (GRMN) has been hit very hard in this recession.  In addition to suffering along with other electronics manufacturers due to declining consumer spending, Garmin’s stock was affected by twin fears of GPS commoditization and competition from cell phones.  As a result, its stock now fetches only about an eighth of its high back in 2007.

Today, Garmin posted sharply lower earnings and revenues for Q4 2008, but these were not as bad as expected.  In addition, the company reduced inventory and suffered only a slight decline in margins, which is very impressive in current environment.  It also gained market share — indeed, its main rival TomTom lost money last quarter and warned that it could be in breach of its loan covenants from the purchase of TeleAtlas (for which it had to pay a very price forced on it by Garmin’s bidding war).

It is clear that Garmin is going to emerge a much stronger company at the end of this recession.  Take a look at this post for more discussion on its prospects.

The earnings season for the last quarter of 2008 is drawing to a close, and, as expected, the results were not pretty.  After the worst January in history, S&P 500 is down 8.5% so far in 2009, on top of terrible losses in 2008.  Unlike 2008, however, where the carnage was spread across all sectors, 2009 presents a different picture.  About a third of S&P 500 companies, specifically in technology and healthcare sectors, are actually up for the year.  Financial sector, meanwhile, continues its steep slide.  In any event, such disparity in performance presents some opportunities for stock pickers.

Here are some of the companies that I track that gave upside earnings surprise and provided higher guidance going forward:  Akamai (AKAM), Buffalo Wild Wings (BWLD), Blackboard (BBBB), Dolby Labs (DLB), Nuance Communications (NUAN), and Netflix (NFLX).

Recession appears to be beneficial for Netflix.  Indeed, it remains one of the few companies holding up remarkably well during the past year as consumers are apparently unwilling to cut down on inexpensive entertainment that the company provides; in fact, using company services more instead of going to movie theaters.  Yesterday, Netflix reported earnings that easily beat Wall Street expectations, and upped the outlook for the next quarter and the full year as well.  This MarketWatch article discusses its quarterly results in detail.

The “net” in the company name is getting traction.  Netflix shied away from making its own branded boxes, instead striking partnerships with DVD, TV, and console manufacturers.  That’s a very clever strategy as it allows the company to concentrate on its strengths rather than get involved in hardware manufacturing where it has no experience.  At present,  DVD players made by LG and Samsung, as well as X-Box player now offer Netflix streaming, with more Netflix-ready devices on the way.

Netflix name could well get synonymous with video streaming.  While it doesn’t yet charge for this service, it will undoubtedly do so in the future, increasing revenues and becoming a truly international company overnight.

The earnings season is in full swing, and this week five technology titans reported their fourth quarter results, and they were decidedly mixed.  On the negative side, Microsoft and Ebay reported lackluster results, and predicted further slowdown ahead.  However, IBM, Apple, and Google soundly beat estimates.

The market, as it has done over the last year, again chose to be pessimistic and concentrated on the negative, interpreting Microsoft’s results as an indicator for the whole industry.  But is it justified?  Both Ebay and Microsoft have had its own specific problems over last few years that are not related to the overall economy.  Microsoft, for example, has been losing mind and market share to Apple for quite some time.

Today, graphics chip maker Nvidia (NVDA) warned that its fourth quarter revenue will decline sequentially by nearly 50%, much worse than 6% drop expected by analysts. To call this development horrible does not do its justice. Under normal circumstances, a high-tech company that issues a warning like this will see its stock plunge.

Today, however, Nvidia’s share actually rose a few cents. Often, when a stock fails to drop in the face of bad news indicates that such news are already priced in (indeed, Nvidia’s shares are now worth about a quarter of what they were going for a year ago), and further declines are not likely. I believe this is indicative not only of Nvidia, but of many other companies in high tech sector. Intel’s warning a few days ago also had little effect on its stock.