7/21/2010
By Brian Sozzi, Research Analyst

Admittedly, it has been a peculiar start to second quarter earnings season for yours truly.  Prior to the unofficial kick off to the releases by Alcoa (AA), I, much like many market mavens, was bracing for the pervasive doom and gloom across the spectrum of companies that I cover.  Investors had bid the S&P 500 down close to 17% from April 26 to July 1 in anticipation of soft earnings and dour comments from management teams.  Sprinkle in an Administration which is clueless on many, many fronts, and suffice it to say the raw fear that enveloped the market was warranted.  The S&P 500 has since rallied 7.1% from July 1, supported by an initial batch of earnings reports for the second quarter that, on balance, does not match the economic death march that was priced in by investors beforehand.

Thus far, there have been revenue beats, there have been earnings beats, and dare I say there have been raised outlooks for the full fiscal year.  Granted, the raised outlooks take into account the strength of 2Q10, but in a world that was supposedly ending, such raises would not be rolling off the tongues of well-dressed executives.  If order rates were drying up internationally at a speed comparable to how fast a woman leaves a cheating man (quick!), management teams would be lowering their outlooks.  The risk reward would be favorable for issuing such lowered outlooks as many stocks sold off more than the broader indices from April 26 to July 1, meaning investor reaction may have been muted.  Lowered outlooks would therefore set the path for earnings beats in 3Q10 and 4Q10.

Back to why the beginning of this earnings season has been weird for me.  Recollect the following themes pre-2Q10 earnings:

1. Any company exposed to Europe was dead meat, no matter if operations were diversified away from a reliance on debt ridden PIIGS countries.
2. U.S. economy was on the precipice of the dreaded double-dip recession, fueled by a pause in consumption by consumers, tepid hiring, tepid corporate investment, and overall anti-business rhetoric by the party controlling the government.
3. Higher costs of doing business not counterbalanced by pricing power.
I may very well be missing some concerns on the minds of investors, but these were the major themes.  At the moment, the numbers I have worked through on Whirlpool (WHR) and Stanley Black & Decker (SWK) do not support the fears in the market.  What do these two companies represent?

* Industry leaders in their respective product segments.
* Global powerhouses with outsized exposure to Europe.
* An attachment to the fortunes of U.S. mass retailers, which are in turn leveraged to the economic standing of the U.S. consumer.
* Big buyers of commodities to produce what they sell.

The Messages of 2Q10
* European inventory re-stocking spurred sales, significant for some areas of business.
* U.S. consumer responded to government incentives.
* Mass market retailers slowly rebuilding inventory to meet demand.
* Underlying demand in Europe is continuing to improve.

The Messages for 2H10
* European de-stocking slowing, but not falling off the map.
* New orders in hard hit areas of business continuing to firm up.
* Pricing power is coming back due to innovation.
* Workers are being asked to come back to plants.

The Real Deal

It's earnings reports like the ones from Whirlpool and Stanley Black & Decker that suggest one of two things (1) there is a serious lag between economic data and how it plays out in corporate financial figures; or (2) the world is alive, but not ready to sprint.  Since I am optimistic by nature, and especially on stocks following the recent bout of weakness, I am zeroing in on option two and scouring for investment opportunities.

Brian Sozzi
Wall Street Strategies