Investors keep returning to forgotten stocks and unwinding flashy technology names.
The last week of earnings saw huge rallies in unglamorous companies like Kroger (KR), CVS Health (CVS) and Coty (COTY). Meanwhile Uber Technologies (UBER), Pinterest (PINS), Roku (ROKU), Expedia (EXPE) and Match (MTCH) skidded lower.
The change results partially from quarterly reports, but it also seems connected to a broader rotation into value stocks. This trend has taken shape as the S&P 500 breaks out to new highs, potentially resulting in a new kind of leadership for the next bull run.
Consider a stock like KR. The 136-year old grocery chain lost about half its value between early 2016 and last August. Increased competition, weak pricing and a shift in customer habits away from brands were to blame. But then on Tuesday morning, it had its biggest rally in at least two decades.
It’s all about company transformation: New private-label brands, new store layouts and home delivery. That let KR beat estimates across the board and predict more improvement in coming quarters.
Synergies at CVS
CVS also struggled in the first half of 2019 as the health-care giant struggled to digest its $69 billion purchase of Aetna. But this week it dispelled those worries with better-than-expected profit. Like KR, it benefited from upgrading brick-and-mortar locations by channeling insurance customers into lower-cost clinics. Are the deal’s synergies paying off?
COTY, which dates back to the early 1900s, also spiked after getting customers to pay top dollar for perfumes by Huge Boss and Gucci. That boosted margins and offset a top-line miss. It also reminded investors that the beauty-products company has turnaround and value potential if synergies emerge. Ralph Lauren (RL) was another old-school consumer stock with strong earnings, revenue and same-store sales.
But then you have UBER. The loss might have been narrower than expected, but it was still a loss. Why are we valuing an unprofitable taxi dispatcher for $45 billion when established businesses like CVS and KR are on the upswing? That sentiment, combined with the expiration of a post-IPO lockup period, planted UBER at a new all-time low in 20s.
Other would-be disruptors took a beating as investor scoffed at their rich valuations. ROKU beat estimates on the top and bottom lines, but the market’s worried about increased competition in the streaming-video space. PINS missed on revenue and outlook. The social media site followed UBER to pre-IPO lows.
Match (MTCH) had a rare fumble as the dating service fought for the affection of users wooed by Facebook (FB) and Bumble. That resulted in a weak outlook. Expedia (EXPE) fared even worse, dropping more than 20 percent after its top and bottom lines missed estimates. Analysts responded by slashing price targets on the travel agency.
Semiconductors Keep Going
Not all tech stocks suffered. Chip stocks like Qualcomm (QCOM) and Qorvo (QRVO) shot higher as investors kept viewing the industry as a way to profit from the spread of mobility and high-speed data — especially 5G networking.
QRVO, formed by the merger of two radio-frequency companies in 2015, spiked to new record levels after crushing estimates. Management cited “significant traction” with 5G companies in China. It’s the S&P 500’s biggest gainer in the last week.
QCOM also had a double beat on the top- and bottom lines. That lifted it above its $90 May peak into new record territory.
Two cybersecurity stocks moved in opposite directions. Fortinet (FTNT) beat estimates and raised guidance for the second straight quarter. Analysts pointed to market-share gains and expansion into new corners of cloud computing.
But Arista Networks (ANET) plunged for the third straight quarter. This time it warned that a single large customer was cutting back on orders.
Health Care on the Mend?
Three other health-care stocks that underperformed for years rebounded. DaVita (DVA) had its biggest rally since late 2017 after earnings and revenue beat estimates. Still, the kidney-dialysis firm warned it might need to spend heavily fighting California ballot initiatives next year.
Cardinal Health (CAH) is also saving money for legal risks — this time a potential multibillion dollar opioid settlement. Aside from that, earnings and profit beat as management reined in costs.
Third, biotechnology company Regeneron (REGN) rebounded from the bottom of its longer-term range. Its Dupixent skin drug surprised to the upside, although analysts remain worried about increased competition.
Chinese Internet giant Baidu (BIDU) also came into its quarter at a long-term low. However its numbers surprised to the upside after streaming-video growth pushed revenue ahead of consensus. Its majority owned media company, Iqiyi (IQ), also jumped. Signs of a trade deal between Beijing and Washington didn’t hurt either.
Nio (NIO) is another long-term laggard that’s spiked higher. The Chinese electric-car maker reported a 25 percent pop in monthly deliveries. It also struck a deal with Mobileye, Intel’s (INTC) autonomous-vehicle division.
In conclusion, earnings reports continue to reflect a shifting beneath the surface in the market as investors return to long-forgotten names. That’s mostly benefited health-care and consumer stocks. Meanwhile, prominent technology companies outside the chip space have struggled.