Turnarounds Get Rewarded: Earnings this Week


Investors like turnaround stories. That seems to be the message from the last week of corporate earnings.

Consider two major retailers: Wal-Mart Stores (WMT) and Macy’s (M). Both beat analysts’ estimates, but moved in two very different directions. Why? It was all about turnaround — or the lack of turnaround.

WMT was the winner, ripping about 10 percent, because it showed a spike in e-commerce. That helped make investors believe the brick-and-mortar colossus is successfully adapting to the click-and-order world. It also had a surge in traffic and same-store sales, possibly because of tax cuts boosting consumer demand. (Less than a week ago, the National Retail Federation raised its full-year industry growth projections partly because of tax cuts.)

M, on the other hand, got hammered because it offered much less hope of lasting improvement. Sure, management might have cleaned up a lot of the damage from previous years when shopping malls were closing left and right. But now that inventories have been right-sized and margins restored, analysts said most of the good news is priced in.

Technology giant Cisco Systems (CSCO) was another turnaround story. Most readers likely know its core business is networking routers and switches. That segment did pretty well last quarter, but the real buzz was its rapidly growing cybersecurity offering. Software companies tend to have stickier revenues and higher multiples than hardware. That could help give investors confidence that CSCO is evolving and staying with the hotter areas within tech.

Speaking of hot, Tapestry (TPR) had its biggest gain in over three years. Its turnaround trick was getting its Kate Spade brand to perform after a rough showing the previous quarter. Management also expects to wring costs out of its operations following major consolidation. Remember, TRP is the combination of Coach, Kate Spade and Stuart Weitzman.

Advance Auto Parts (AAP) also showed signs of a turnaround by predicting same-store sales will stop falling. Analysts also think the company can benefit from the same demand trends that helped WMT.

Home Depot (HD), however, might have beaten estimates. But its same-store sales growth was less impressive and sentiment remains weak in housing. As a result, HD has gone nowhere.

But some companies are going places — bad places. JC Penney (JCP) is the most obvious name, cratering to a new multi-decade low on the heels of bad earnings. If ever a stock was in need of a turnaround…

Then you have Chinese tech stocks.

Not only is the country showing signs of a real economic slowdown. ViShop (VIPS) and JD.com (JD), both e-commerce players, probed new lows after missing estimates. Video-game developer Huya (HUYA), which enjoyed a brief rally after going public in May, also missed. Even companies that surpassed estimates, like Weibo (WB), got punished.

This group seems to have the double problem of trade worries hurting sentiment in China, along with their own weakening financials. Tencent, another Web giant that doesn’t trade on major U.S. markets, also got hammered overseas on poor results.

Two smaller U.S. tech stocks should also get mentioned. Cloud-computing firm NetApp (NTAP) sputtered lower this morning despite beating estimates. While the numbers were good, investors seemed wary of chasing a stock that’s doubled in the last year.

Switch (SWHC), a cloud infrastructure stock once viewed as a promising growth story, tumbled to a new low after missing estimates. Analysts responded with a wave of negative comments, saying management needs to improve execution.

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David Russell is Global Head of Market Strategy at TradeStation. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.