Reacting Smartly to an Overreacting Market We're in a reactionary stock market right now.
Investors are reacting – or more accurately overreacting – to headlines about the economy, inflation, and earnings.
This week's double whammy was the U.S. economy expanded less than expected in the first quarter while consumer prices increased more than expected. A slower economy with higher prices over a longer period of time would be concerning, but the latest data didn't derail the more established trends of lower inflation economic growth.
Throughout the handwringing, stocks still moved higher – especially tech stocks that are jumping today after strong reports from Microsoft and Alphabet. Our TradeSmith Investment Portfolio stocks gained a solid 3.5% on average, boosted by double-digit gains in Monolithic Power Systems (MPWR) and KLA Corp. (KLAC) that offset Old Dominion Freight Line's (ODFL) slide after investors overreacted to the company's latest earnings report.
I find Big Money's behavior interesting, so let me share another peak inside my system. Over the last 10 days or so, the trend has been more buying (the rising green bars) and less selling (the shorter red bars). 
Source: MAPsignals.com It's too early to know for sure if that will continue, but it is an interesting data point that tells us Big Money might still be looking to buy. It suggests that the selling is from what we call "weak hands," which tends to be more individual investors.
Earnings will continue influencing that. We saw it today with those strong reports from Alphabet (GOOGL) and Microsoft (MSFT) sparking the rally in tech stocks. And we saw it this week with our stocks – both good and bad.
Earnings remain positive overall, with roughly three out of four S&P 500 companies beating earnings expectations. But as we'll see in a moment, even that doesn't guarantee a post-earnings bounce in this reactionary market.
It does, however, reinforce my bullish outlook for the year. That's why we need to stay invested in the highest-quality, large-cap stocks in the market.
And you know the formula: strong fundamentals, solid technicals (which fluctuate more than fundamentals), and Big Money inflows.
I'm looking at potential new buys as we speak, hoping we can add another great company at a lower price that meets our criteria. Look for more details in the new Monthly Issue coming your way next Friday.
In the meantime, let's check on our companies that reported earnings this week and look ahead to what's on the schedule for next week. 
Earnings Updates: ODFL, NOW, SPGI, KLAC Old Dominion Freight Line (ODFL) largely met expectations with last quarter's results, but the stock fell on guidance and comments in line with other shipping companies about continued softness in the economy.
The company earned $1.34 a share, up 4% from a year ago and matching estimates. Sales grew 1.4% to $1.46 billion, slightly below estimates.
At the same time, CEO Marty Freeman said the company sees signs that demand may be increasing. Chief Financial Officer Adam Satterfield cited strength from retail customers but said that shipping by manufacturers hasn't picked back up yet. He expects a boost in the next few months.
Shares fell 11% on Wednesday after the report, taking us into the red with shares down under $200 where it has consolidated and found support multiple times in the past year.
My colleague and partner in our research firm, Luke Downey, ran what we call a signal study on ODFL after its 11% slide on Wednesday, thanks to software developed by TradeSmith. The results are encouraging. Shares have fallen that much or more in a day 38 times in the past, and they are 11% higher on average two months later (42 trading days). 
Old Dominion Freight Line's Quantum Score is 63.8, which is not bad but dragged down by the Technical Score. Most importantly, the fundamentals still score extremely well at 79.2, and they should help push shares higher as the shipping market strengthens. Buy ODFL while it's back under our $210 limit.
ServiceNow (NOW) reported excellent results Wednesday evening, but guidance for software subscription revenue was slightly below expectations. We're seeing this a lot right now: If guidance isn't stellar in stocks that have run up, investors bail – mistakenly so, in my opinion.
The company generated $2.6 billion in sales last quarter, 24% more than last year and edging the consensus estimate. Earnings surged 44% to $3.41 per share, easily beating the Street at $3.14.
Not surprisingly, the digital workflow software company continues to talk up its expansion into artificial intelligence.
The only "problem" – and it's a stretch to call it that – was software subscription revenue guidance. Management forecast 22% growth in the current quarter to $2.53 billion, which was slightly below estimates for $2.54 billion. For the year, management forecast $10.56–$10.57 billion in revenue, again barely below estimates for $10.59 billion.
(CEO Bill McDermott talked about the results, A.I., and more in an interview on CNBC that you can watch here.)
It's ridiculous, but in a stock that rallied 30% in the last six months, investors overreact to any hint of disappointment and take profits. And in quality stocks like NOW, they usually miss out on bigger profits down the road.
Yesterday's 4% pullback was pretty minor in the big picture, and my outlook hasn't changed. NOW continues to trade above our $700 buy limit, but it's a buy if it dips below that price in any broader market weakness.
S&P Global (SPGI) grew earnings 27% last quarter to $4 per share, easily beating expectations for $3.66. Sales increased 10.5% to $3.5 billion, also topping estimates.
In addition to the double beat, management raised the full-year earnings forecast to $13.85-$14.10 per share, up 10 cents on the bottom and top ends of the range. That's always great to see, and investors love it.
It was a solid report for this financial data and analytics company, and I expect its Fundamental Score will increase from 70.8 when the data feed updates to include the latest numbers. The technicals are middling right now as the stock has traded mostly sideways the last couple of months.
KLA Corp. (KLAC), one of our semiconductor leaders, also reported strong results that reinforce the stock's potential.
Sales hit $2.36 billion, surpassing both the midpoint of management's guidance and Wall Street's estimates for $2.31 billion. And the company earned $5.25 per share, nicely ahead of expectations for $5.01.
I also loved hearing CEO Rick Wallace say that market conditions have "stabilized," and "we expect our business levels to improve as we progress through the year." That's reflected in guidance for the current quarter, most of which was above current estimates. 
Source: TradeSmith Finance and MAPsignals.com Shares moved nicely higher today after the report, and we're now approaching 30% gains. The strong scores and data show more profits to come, so hold KLAC as it trades above our buy limit. More Earnings to Come Next Week Four more companies are scheduled to release their results next week, meaning we hear from nearly half of our portfolio in just two weeks.
Advanced Micro Devices (AMD) reports Tuesday after the market closes. Earnings are expected to shrink 5% to $0.57 per share, but growth is expected to resume next quarter with earnings forecast to increase 12%, 28.3% for the year, and a powerful 52% next year.
Monolithic Power Systems (MPWR), another semiconductor company, is also expected to report earnings are down from a year ago when it releases results on Wednesday after the close. Revenue is forecast to be flat. Here again, though, growth should resume in the current quarter, through the year, and accelerate even more next year.
Linde (LIN) follows Thursday morning, with the Street looking for 7% earnings growth to $3.67 per share on 2.5% sales growth. And as with AMD and MPWR, expectations are for higher growth in the current quarter, next quarter, and next year.
Novo Nordisk (NVO), our newest stock, ends the week with its results Friday morning. Estimates are for 14% earnings growth to $0.73 per share on robust 19% sales growth – thanks to the company's leadership in diabetes and weight loss drugs like Ozempic and Wegovy.
I'll keep a close eye on the reports, the market, and our stocks, and I'll update you again next Friday in our Monthly Issue. As I mentioned, I'm screening for new opportunities right now. It's a good time to buy quality stocks at lower prices for both lower risk and higher profits heading into the future.
Have a great weekend! I'll talk to you next week.
Talk soon, 
Jason Bodner
Editor, TradeSmith Investment Report |
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