Wednesday, September 22, 2010

Adobe (ADBE) Shows Us How Difficult Earnings Season is Going to Be

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Lost in this non stop rally has been an increased amount of earning warnings - the first time in quite a few quarters we have seen some quite visible names find an inability to keep up with analysts ever rosier outlooks.  Earnings season begins in a few weeks and as I have said the past 3-4 periods, despite all the advantages handed to the 'masters of the universe' (U.S. multinationals) this is the first earning period where year over year comparisons are finally going to get a bit tougher.  Further, the 9-10%+ straight up rally is going to leave many names vulnerable if there is not a correction in the market the next 2 weeks.  This is especially true of many of the 'momo' (momentum) stocks - what were once leadership stocks but have now turned into a cadre of 50-100 stocks that people buy every day, at any price under the guise of "it only goes up".  This works well for 89 days a quarter (as long as the Kool Aid is flowing) since there is no real news to check against the every expanding valuation.  But then a reality check can happen the other 1 day of the quarter - earnings release day.  At this point the valuation in the 'momo' section of the stock market is so extreme, and charts so extended, I offer that even a misplaced comma in an earnings release is going to cause havoc in some of these stocks come mid October.  Which is another reason it is difficult to buy almost anything here... not only have some of these stocks rallied straight up 25-40%+ without a break, they are detached from any meaningful support on the chart AND must actually offer an earnings report in the not too distant future.  So any purchases need to be culled significantly in just a few weeks as the risk of a poor reaction is now immense.  I realize at this point of emotional buying, valuation is "old school" [Sep 2, 2010: I Want my Salesforce.com] but it does usually matter 1 day a quarter, no matter how much Kool Aid Quantitative Easing is flowing through the system.

To represent this I am going to talk about Adobe (ADBE) which is not even one of the 'momo' stocks... they did spike a few weeks ago as Apple (AAPL) agreed to budge on the moat they have built around their applications.  But that was a sort of unique one off news event, rather than one of these stocks that is related to the cloud in some manner and hence must go up 18 out of every 19 sessions.  However, the company reported solid numbers last night but came in a bit light in revenue guidance.  When stocks are priced for perfect "a bit light" means you receive an instant 20%+ haircut in stock price.  As I type the stock is below $26 in premarket.


That's one way to fill a gap.

So you can chase, and chase and chase all these names up without regard to valuation or sense, but the window for reality check is coming soon and the risk for the people who only buy stocks because they were up 7 of the previous 8 sessions, increases by the day.

  • Adobe's adjusted earnings and revenue for its fiscal third quarter that ended Sept. 3 surpassed analysts' expectations.
  • The company said it saw some weakness in its U.S. education segment and its Japanese creative business during the period due to the difficult economy, and that pulled its revenue guidance for the fiscal fourth quarter below what investors were hoping for.
  • The company said it expects revenue between $950 million and $1 billion for the current quarter, lower than the $1.03 billion analysts are looking for.
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